Question

When the economy is experiencing a recession, why would a neoclassical economist be unlikely to argue for aggressive policy to stimulate aggregate demand and return the economy to full employment? Explain your answer.

a) Neoclassical belief in self-adjusting markets; Assumes no wage and price rigidities
b) Neoclassical support for active fiscal policy; Assumes sticky prices and wages
c) Neoclassical preference for discretionary monetary policy; Assumes flexible labor markets
d) Neoclassical reliance on supply-side policies; Assumes constant government intervention

Answer 1

Neoclassical economists believe in self-adjusting markets without wage and price rigidities, and argue that the economy will naturally return to full employment, seeing government intervention as potentially creating inefficiencies and recommending against aggressive policies to stimulate aggregate demand during a recession.

Step-by-step explanation:

When the economy is experiencing a recession, a neoclassical economist is unlikely to argue for aggressive policy to stimulate aggregate demand and return the economy to full employment because they hold a strong belief in self-adjusting markets. These economists assume that there are no wage and price rigidities, meaning that in their view, supply and demand in labor and goods markets will naturally adjust to return to an equilibrium state of full employment without the need for government intervention.

Neoclassical economic theory suggests that any external interference, such as active fiscal or monetary policy, might lead to inefficiencies or distortions. According to this school of thought, the economy's return to equilibrium can be slowed down due to government actions that may not be enacted promptly or efficiently. Thus, neoclassical economists would prefer to let the economy self-correct, even if it takes longer for the unemployed to find work, rather than risk the potential long-term structural issues that could arise from government intervention.