Question

In the Classical Theory, it is the price-wage-interest rate _____________ that restores the economy to full employment if Household or Business spending declines..

Answer 1

flexibility

Step-by-step explanation:

According to classical economists, the price-wage-interest rate flexibility refers to a combination of flexible factors that maintains economic stability:

• Flexible interest rates keeps the money markets (loans) in equilibrium.
• Flexible wages keeps the labor market in equilibrium.
• Flexible prices keeps the goods and services markets in equilibrium.

Therefore, if spending declines, the economy will self-adjust using flexible interest rates (interest rates should lower), flexible wages (wages should lower) and flexible prices (prices should lower) until the economy rebounds.