Since classical economists and monetarists believe that the economy operates at full employment,real GDP,that is,along the vertical segment of aggregate supply,then:

Question

Quizplus · Accepted Answer

According to the classical and monetarist theory, an increase in the money supply is assumed to lead to an increase in aggregate demand, but this is only effective until the economy reaches full employment. After full employment is reached, any increase in aggregate demand will only lead to an increase in the price level, as the economy cannot produce more output beyond the full employment level. Therefore, any increase in the money supply can only end up raising the price level.

Since Classical Economists and Monetarists Believe That the Economy Operates