Classical economists point out that:
A) there is a trade-off between unemployment and inflation.
B) an increase in the money supply leads to a proportional rise in the price level.
C) government spending can affect aggregate demand.
D) there is a possibility of a liquidity trap.

Question

Quizplus · Accepted Answer

Classical economists believe in the Quantity Theory of Money, which states that an increase in the money supply will lead to a proportional increase in the price level. This is known as the "classical dichotomy." They do not believe in a trade-off between unemployment and inflation, as they believe the economy will naturally adjust to full employment in the long run. While they acknowledge that government spending can affect aggregate demand, they believe that any short-term benefits from government intervention will be offset by long-term negative consequences, such as inflation. Finally, the idea of a liquidity trap is not part of classical economics, as they believe that people will always be willing to hold cash at some interest rate.

Classical Economists Point Out That