Most economists believe that the classical model is the appropriate model for analysis of the economy in the
A)long run,because evidence indicates that money is not neutral in the long run.
B)long run,because real and nominal variables are essentially determined separately in the long run.
C)short run,because money is neutral in the short run.
D)short run,because real and nominal variables are not highly intertwined in the short run.

Question

Quizplus · Accepted Answer

Most economists believe that the classical model is appropriate for long-run analysis because it assumes that real variables, such as output and employment, are determined by technology, resources, and institutions, while nominal variables, such as prices and wages, are essentially determined by the quantity of money. In the long run, changes in the quantity or growth rate of money will mainly affect the price level, with little or no impact on real variables. This is known as monetary neutrality or the neutrality of money. The classical model assumes that markets clear and that there are no frictions or rigidities, so that the economy always operates at its potential output level, which is determined by the available factors of production and technology. Therefore, in the long run, real and nominal variables are essentially determined separately.

Most Economists Believe That the Classical Model Is the Appropriate