Chapter 20: Problem 7

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment is a. supply-side economics. b. Keynesian economics. c. classical economics. d. mercantilism.

Short Answer

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The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment is: c. classical economics.

Step by step solution

Review Option A: Supply-side economics

Supply-side economics is a macroeconomic theory which argues that economic growth can be most effectively achieved by lowering taxes and decreasing regulation. This theory gained prominence in the late 20th century and was not popular prior to the Great Depression. Therefore, option A is not the correct answer.

Review Option B: Keynesian economics

Keynesian economics, named after the British economist John Maynard Keynes, is an economic theory that emerged during the Great Depression. This theory argues that governments need to intervene in the economy, using fiscal and monetary policies to stimulate aggregate demand and achieve full employment. Since Keynesian economics emerged during the Great Depression, it cannot be the popular theory prior to it. Therefore, option B is not the correct answer.

Review Option C: Classical economics

Classical economics is a set of economic theories developed by economists such as Adam Smith, David Ricardo, and John Stuart Mill. The classical economists believed in the self-regulating nature of the economy and that with flexible prices, full employment would be achieved automatically. This belief is in line with the statement from the exercise, making option C the correct answer.

Review Option D: Mercantilism

Mercantilism is an economic theory and practice that was dominant in Europe from the 16th to the 18th century. Its main principles revolved around the accumulation of wealth through trade, protectionist policies, and a favorable balance of trade. Mercantilism does not focus on the automatic adjustment of the economy to achieve full employment, so option D is not the correct answer. In conclusion, the popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment is: c. classical economics.

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