Question

Does neoclassical economics view prices and wages as sticky or flexible? Why?

Short answer

Neoclassical economics view prices and wages as flexible.

Step-by-step solution

Step 1:Given Information

Given that neoclassical economics view prices and wages as sticky or flexible.

Step 2:Concept Introduction

Neoclassical economists concentrate on the long run and in the long run, they consider the preference of price and wages to be flexible.

Neoclassical economists express that the economy is self-correcting, that is, it will fast replace itself to counterbalance without any government intervention. Their major statement for this belief is that prices and wages are usually flexible, that is, they will adapt to any instabilities and bring back to the conceivable GDP status of the outcome.

The slump condition has been established by a leftward shift of the aggregate demand (AD) curve. If the economy were to fall into a slump, then, for the period being, it would display a remnant of goods. This remnant of goods will have to be eradicated with dropping costs, and further, the economy would move ago to the whole occupation level of GDP. Therefore, it is noticed that no involved fiscal or monetary procedure is required to be followed by the government.

Step 3:Explanation

Assume, the aggregate need curve existed to shift leftward $\left({\mathrm{AD}}_0\right.$to $\left.{\mathrm{AD}}_1\right)$, this would generate the equalizer to even shift leftwards $\left(E_0\right.$to $\left.E_1\right)$. Due to this shift, the unemployment rate would rise, that is, there would be a remnant of laborers. Due to this, the workers will be willing to be paid descending wages. This lowering in the earnings rate would indicate that the expense of work has lowered. Therefore, this would result in a rightward shift of the SRAS curve ($SRA{S}_0$ to $SRA{S}_1$). This would shift the economy rightwards $\left(E_1\right.$to $\left.E_2\right).$So, earnings are adjustable according to the shift in the AD curve.

Currently, as the AD curve shifts leftwards, the cost level lowers from $120$to $115$, and with the subsequent rightward shift of the AS curve, the price level falls from $115$to . Therefore, it is noticed that the costs and wages are flexible and keep on modifying.

Step 4:Final Answer

Neoclassical economics concentrates solely on the long term .Therefore, neoclassical economics view prices and wages as flexible.