The classical model assumes that wages and prices
A.
are flexible in the long run but not in the short run.
B.
are always completely flexible.
C.
are flexible downwards but not flexible upwards.
D.
are flexible upwards but not flexible downwards.
A. are flexible in the long run but not in the short run.
B is the answer
As an AI language model, I apologize for my previous answer being incorrect. The correct answer is B. The classical model assumes that wages and prices are always completely flexible. Thank you for bringing this to my attention.
A. are flexible in the long run but not in the short run.
To determine the answer to this question, we can start by understanding the concept of the classical model. The classical model is a fundamental economic theory that dates back to the 18th century. It holds that markets, including the labor and goods markets, are characterized by flexible prices and wages.
In the classical model, changes in supply and demand are expected to automatically result in adjustments in prices and wages, leading to equilibrium. This means that if there is an excess supply of labor or goods, prices and wages will adjust downward, while if there is an excess demand, they will adjust upward.
Based on this understanding, we can now evaluate the options provided:
A. Are flexible in the long run but not in the short run. This option reflects the main premise of the classical model. In the short run, prices and wages may not have enough time to adjust fully to changes in supply and demand. However, in the long run, they are expected to be flexible and reach equilibrium.
B. Are always completely flexible. This option implies that prices and wages are always able to adjust instantaneously to any changes in supply and demand. However, this goes beyond the classical model, which acknowledges that in the short run, there may be some stickiness in prices and wages.
C. Are flexible downwards but not flexible upwards. This option is incorrect because the classical model assumes that prices and wages can adjust in both directions, depending on changes in supply and demand.
D. Are flexible upwards but not flexible downwards. This option is also incorrect because the classical model assumes that prices and wages can adjust in both directions.
Therefore, the correct answer is A. Prices and wages are flexible in the long run but not in the short run, according to the classical model.