What idea does the classical dichotomy refer to?
A) The supply of money is irrelevant for understanding the determinants of nominal and real variables.
B) The supply of money determines nominal variables, but not real variables.
C) The supply of money determines real variables, but not nominal variables.
D) The supply of money is a determinant of both real and nominal variables.

Question

Quizplus · Accepted Answer

The classical dichotomy refers to the idea that in the long run, changes in the money supply only affect nominal variables, such as prices and wages, and have no effect on real variables, such as output and employment. Therefore, option B is the correct answer as it states that the supply of money determines nominal variables but not real variables.

What Idea Does the Classical Dichotomy Refer To