If the economy diverges from its full-employment output, new classical economics would suggest that
A) a change in the velocity of money would be all that is needed to return it to its full- employment output.
B) an improvement in insider-outsider relationships is all that is needed to return it to its full- employment output.
C) an eﬃciency wage in the economy would return it to its full-employment output.
D) internal mechanisms within the economy would automatically return it to its full- employment output.

Question

Quizplus · Accepted Answer

New classical economics assumes that the economy has self-correcting mechanisms that will automatically return it to its full-employment output. These mechanisms include price and wage flexibility, market competition, and rational expectations. Therefore, the correct option is D, which states that internal mechanisms within the economy would automatically return it to its full-employment output.

If the Economy Diverges from Its Full-Employment Output, New Classical