Final answer:
The classical economists' belief that prices and wages adjust quickly to maintain full employment is generally true, aligning with a subset of neoclassical economists who support the theory of rational expectations. However, the speed of these adjustments can be a contentious topic, with some suggesting rapid changes while others, like Keynesian economists, envision a more gradual process.
Step-by-step explanation:
The classical economists indeed believed that prices and wages adjust quickly to maintain the economy at full employment. However, this view is somewhat different from that of the neoclassical economists, who, under the theory of rational expectations, also posit that wages and prices can adjust quickly but recognize that this adjustment can vary in duration. In the neoclassical perspective, the speed of macroeconomic adjustment can be contentious, with some suggesting rapid adjustments while others argue for a slower process. This difference is also evident in the debate between neoclassical and Keynesian economists, the latter of whom argue that adjustments can take a significantly longer time, potentially rendering the neoclassical theory impractical for immediate economic issues. The response to the question is Following neoclassical views, in the short run, an increase in aggregate demand might result in temporary changes to output and employment. However, any deviation from the natural rate of unemployment would prompt corresponding wage and price adjustments that tend to bring the economy back to its potential GDP, albeit potentially with changes to the price level. This adjustment, according to rational expectations—a subset of neoclassical theory—can occur very swiftly, while the Keynesian perspective suggests a more gradual change.In conclusion, while the statement is broadly true from the neoclassical perspective, particularly concerning the subset that holds to rational expectations, it is important to recognize that not all economists agree on the rapidity of these adjustments, and the complexity of real-world economic dynamics can lead to different outcomes.