Since, in classical economic theory, both the velocity of money and real output are assumed to be stable,
A) Changes in the quantity of money explain changes in the price level.
B) Changes in the quantity of money explain changes in real GDP.
C) Changes in the money supply cause changes in the velocity of money.
D) Prices are fixed.

Question

Quizplus · Accepted Answer

Since changes in real output are assumed to be stable in classical economic theory, any changes in the economy's total output must be due to changes in the quantity of money. Therefore, changes in the quantity of money explain changes in the price level. This is known as the Quantity Theory of Money, which states that the general price level varies directly with the amount of money in circulation, assuming that the velocity of money and real output remain constant.

Since, in Classical Economic Theory, Both the Velocity of Money