In the classical model, an increase in the money supply will result in:
A) inflation only, without affecting aggregate output.
B) economic expansion, as aggregate output will increase.
C) higher interest rates, lower investment, and ultimately lower aggregate output.
D) recession only, without affecting the aggregate price level.

Question

Quizplus · Accepted Answer

In the classical model, an increase in the money supply is viewed as leading to inflation without affecting the real variables like aggregate output. The model assumes prices are flexible and markets clear, meaning that any excess money supply will simply translate into higher prices rather than real economic effects like changes in output or employment.

In the Classical Model, an Increase in the Money Supply