The relationship between money supply, output, and the overall level of prices is illustrated by the:
A) classical theory of inflation.
B) neutrality of money.
C) aggregate price level.
D) measure of real output.

Question

Quizplus · Accepted Answer

The classical theory of inflation explains the relationship between money supply, output, and the overall level of prices. According to this theory, an increase in the money supply leads to an increase in prices, while output remains unchanged in the long run. This is because the increase in the money supply leads to an increase in demand, which leads to an increase in prices. In the long run, however, output is determined by the factors of production and technology, and is therefore not affected by changes in the money supply.

The Relationship Between Money Supply, Output, and the Overall Level