According to classical economic theory, which of the

following mechanisms ensures that the economy naturally tends towards full employment?

A Government intervention through fiscal and monetary policy. Correct Answer Incorrect Answer

B The flexibility of wages and prices in response to changes in supply and demand. Correct Answer Incorrect Answer

C The existence of a minimum wage law. Correct Answer Incorrect Answer

D The presence of labor unions. Correct Answer Incorrect Answer

E The availability of unemployment benefits. Correct Answer Incorrect Answer

Solution

Classical economists believe that wages and prices are flexible and will adjust to clear markets. If there is unemployment, wages will fall, leading to increased demand for labor and eventually full employment. This is in contrast to Keynesian economics, which emphasizes the role of government intervention to achieve full employment.

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