Final answer:
Classical economics posits that wages, prices, and interest rates should be flexible, adjusting to changes in the economy to maintain equilibrium and clear markets. Though countered by the concept of sticky wages and prices, which suggests rigidity in these variables can lead to unemployment, classical theory maintains that over time, flexibility prevails and the macroeconomy adjusts.
Step-by-step explanation:
The classical economics position with respect to wages, prices, and interest rates suggests that these variables are flexible, able to move both upward and downward in response to changes in supply and demand. This perspective assumes that the economy tends toward equilibrium; therefore, wages and prices are not sticky but instead adjust to clear markets. When it comes to interest rates, classical economists also view them as flexible, changing to equilibrate the supply and demand for loanable funds.
However, classical economic theory has been challenged by the concept of sticky wages and prices. This notion suggests that wages and prices do not adjust quickly to changes in economic conditions, particularly during a downward shift in demand. For example, if aggregate demand decreases, classical theory would expect wages and prices to decrease accordingly to restore equilibrium. Yet, sticky wages and prices can persist at higher levels than equilibrium would dictate due to various market imperfections, leading to potential short-run or long-run unemployment.
Nonetheless, the classical view remains focused on the idea that over the long term, wages, prices, and interest rates are indeed flexible. Economists draw upon this classical viewpoint to suggest that while there may be short-term rigidities, the macroeconomy adjusts back to its level of potential GDP as these variables eventually flex and markets clear.