Question

In the neoclassical model, low inflation is good because _________________.

Select the correct answer below:

it provides a better climate for government to increase spending

it provides a better climate for businesses to increase their prices

it provides a better climate for a healthy and growing economy.

it reduces the need for bank supervision and oversight.

Answer 1

The neo-classical model revolves around the concepts of market demand and supply and believes that government or federal reserve interventions are not required or necessary to keep the market stable. They are of the opinion that the forces of demand and supply are themselves capable of achieving a higher growth rate and taxes and tariffs should also never be applied to business owners. This ensures maximum demand and investment in the economy as per them.

Now, when we look at the options available, option 1) proposes an increase in government spending which is exactly what the neoclassical model is against. They do not advocate government spending in the economy; therefore, the option is false.

Option 2 indicates that businesses increase their prices, however this is opposed to the idea of market regulated prices and thus is not a correct answer as unilateral pricing decisions are not promoted by the neoclassical model, but it is rather focused in ensuring that the market demand and supply decide prices. Therefore, this option is also false

Option 3 here looks to be the correct answer as a low inflation rate keeps consumer demand for goods and services high and investment levels also peak out in these conditions due to the same. The health of the normal economy is such, that the country is growing and stable this option is therefore true

Option 4)

Again, the purpose of the neoclassical model is not regulation but rather free market economics therefore this option is also false

The correct answer is option 3)

Please feel free to ask your doubts in the comments section.