Future Business Leaders of America (FBLA) Agribusiness Practice Test

Which economic theory suggests that interference by government is harmful?

1. Marxist theory

2. Classical economic theory

3. Behavioral economics

4. Monetary policy

The correct answer is: Classical economic theory

Classical economic theory posits that the economy functions best when left to its own devices, with minimal government interference. This school of thought, prominent in the 18th and 19th centuries, was championed by economists like Adam Smith, who argued that individuals pursuing their self-interest in a free market would lead to optimal outcomes for society as a whole. The belief is that supply and demand should naturally regulate prices and production, and that government intervention, such as excessive regulation or control, disrupts this balance and hampers economic efficiency. Thus, according to classical economic theory, a laissez-faire approach, where government plays a limited role, is seen as most beneficial for economic growth and stability. Other theories, such as Marxist theory, take a contrary stance by advocating for significant state control over economic resources. Behavioral economics focuses on the psychological factors influencing economic decisions, rather than the structural role of government interference. Monetary policy refers to the actions taken by a central bank to manage the money supply and interest rates, which involves government intervention but is not primarily concerned with the harm of such interference in economic theory.