The classical dichotomy argues that changes in the money supply
A)affect both nominal and real variables.
B)affect neither nominal nor real variables.
C)affect nominal variables,but not real variables.
D)do not affect nominal variables,but do affect real variables.

Question

Quizplus · Accepted Answer

The classical dichotomy states that changes in the money supply only affect nominal variables, not real variables. Real variables, such as the relative prices of goods and services, real interest rates, and real wages, are determined by real factors such as technology, resources, and preferences, and are unaffected by changes in the money supply. However, nominal variables, such as nominal interest rates, nominal wages, and nominal prices, are influenced by changes in the money supply.

The Classical Dichotomy Argues That Changes in the Money Supply