The classical theory of inflation:
A) describes a long-run equilibrium.
B) explains the direct relationship between money supply and the price level.
C) shows neutrality of money in the long run.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

The classical theory of inflation describes a long-run equilibrium where the economy is operating at its potential output level. It also explains the direct relationship between money supply and the price level, as changes in the money supply lead to proportional changes in the price level in the long run. Furthermore, the classical theory of inflation shows neutrality of money in the long run, meaning that changes in the money supply do not affect the economy's real variables such as output and employment in the long run.

The Classical Theory of Inflation