According to the classical model:
A) the aggregate supply curve is horizontal.
B) increases in the money supply lead to proportional increases in the price level but not to change in real output.
C) increases in the money supply lead to proportional changes in output but no change in the price level.
D) we are all dead in the long run.

Question

Quizplus · Accepted Answer

According to the classical model, increases in the money supply will only lead to proportional increases in the price level but not to changes in real output. This is because the economy is always at full employment in the long run, so any increase in aggregate demand will simply lead to higher prices. This is known as the quantity theory of money.

According to the Classical Model