Which school would most likely argue that the economy is self-adjusting in the long run?

• A. New Classical
• B. Keynesian
• C. Classical
• D. Monetarist

Answer: (C)

In classical thinking, markets are flexible and prices and wages adjust freely. When there’s a mismatch between supply and demand—like unemployment or excess supply—moves in prices and wages push the economy back toward balancing output with resources. Over the long run, this self-correcting process leads the economy to its potential level of output, with real variables determined by technology and resources rather than persistent mispricings. Because of this, government stabilization is seen as unnecessary for achieving full employment in the long run—the economy naturally gravitates there through market adjustments.

Keynesian views emphasize that prices and wages can be sticky and that active policy is needed to close gaps in the short run, which is why they don’t portray the economy as automatically self-correcting. Monetarists focus on how the money supply affects nominal variables and long-run price levels, not on automatic real-output corrections, and New Classical theories highlight expectations and market clearing but the classical description most directly captures the idea of a self-correcting long-run adjustment.