What is classical dichotomy?
A) It is the separation of variables that move with the business cycle and variables that do not.
B) It is the separation of changes in money and changes in government expenditures.
C) It is the separation of endogenous and exogenous variables.
D) It is the separation of real and nominal variables.

Question

Quizplus · Accepted Answer

Classical dichotomy is the separation of real and nominal variables in the economy. Real variables (such as employment, real GDP, and real interest rates) are determined by non-monetary factors, whereas nominal variables (such as money supply, inflation, and nominal interest rates) are influenced by monetary factors. The classical view assumes that changes in the money supply affect only nominal variables and do not affect real variables in the long run.

What Is Classical Dichotomy