Assume that there is an internal shock under fixed exchange rates. According to new classical economists, if the government does not intervene, which of the following will occur?
(i) Internal balance will be restored.
(ii) Current account balance will be restored.
(iii) Overall external balance will be restored.

Question

Quizplus · Accepted Answer

New classical economists believe in the self-correcting nature of markets. They argue that in the case of an internal shock under fixed exchange rates, without government intervention, the economy will adjust on its own to restore internal balance (i.e., equilibrium in the domestic economy) and overall external balance (i.e., a balance between the current account and capital flows). This adjustment process is facilitated by changes in prices, wages, and interest rates that influence economic behavior and restore equilibrium.

Assume That There Is an Internal Shock Under Fixed Exchange