Since classical economists and monetarists believe that the economy operates at full employment, real GDP, that is, along the vertical segment of aggregate supply:
A) any increase in the money supply can only end up raising the price level.
B) any increase in the money supply can only end up lowering the price level.
C) any decrease in the money supply can only end up raising the price level.
D) changes in the money supply will not affect the price level.
E) any increase in the money supply will cause both nominal and real GDP to increase.

Question

Quizplus · Accepted Answer

Classical economists and monetarists believe in the vertical segment of aggregate supply at full employment level. An increase in the money supply will only result in an increase in the price level, as the economy is already at full employment level of output. This is because an increase in the money supply will lead to an increase in demand for goods and services, but since the economy is at full employment, the supply of goods and services cannot be increased, which results in higher prices.

Since Classical Economists and Monetarists Believe That the Economy Operates