Chapter 33, Problem 3MCQ

To determine

The correct option for the classical model of the price level.

Answer to Problem 3MCQ

From the available options, the correct option is periods of high inflation.

Explanation of Solution

The classical model of price level would be most applicable during the time period of high inflation because it helps to adjust the price at equilibrium. In other words, it supports decreasing the price of goods and services by increasing the real supply of money in the economy with decreasing interest rates. Whereas this model would not be suitable in a period of low inflation as by decreasing the interest rates, the prices would fall more than the appropriate level of price.

Moreover, this model would not be helpful to control wages, and interests when the economy is in a complete downturn. And, the classical model can rise the wage in the early phase of the depression but after that, it would not provide any assistance.

Therefore, the correct option is b (periods of high inflation) and all other options are incorrect.

Economics Concept Introduction

Introduction: The classical model of price indicates that the economy is flowing freely and prices can be adjusted according to the ups and downs in the economy such as in good economic conditions, prices will go up.