Question

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

Short answer

Neoclassical economists believe that prices and wages are flexible in the long run.

Step-by-step solution

Introduction of neoclassical economics.

Say's the law has a long-run outlook for neoclassical economists. Prices and earnings, they believe, are long-term variables.

Explanation of solution.

Without government involvement, the economy self-corrects and adjusts. When the economy's aggregate demand falls short of its potential output, the $AD$ curve shifts to the left, signaling a recession. There is a surplus of goods and services as a result of the recession. Prices will reduce in the long run as a result of surplus supply, resulting in an increase in demand for commodities. It will cause the $AD$ curve to shift to the right, bringing the economy back to the full employment level of GDP.