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:
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.

Question

Quizplus · Accepted Answer

Classical economists and monetarists believe that the economy operates at full employment, real GDP, along the vertical segment of aggregate supply. This means that any increase in the money supply will only cause an increase in the price level, without affecting the quantity of output. This is known as the quantity theory of money, which states that the nominal value of output (price level times output) is equal to the quantity of money times the velocity of circulation of money. Therefore, an increase in the money supply, with velocity constant, will cause a proportionate increase in the price level.

Since Classical Economists and Monetarists Believe That the Economy Operates