If the classical dichotomy holds a change in monetary policy, it ________ and ________.
A) increases employment; reduces taxes
B) has no real effects; only affects nominal variables
C) changes output; has no influence on inflation
D) will reduce unemployment; cannot increase inflation
E) has no nominal effects; only moves real variables

Question

Quizplus · Accepted Answer

The classical dichotomy states that real variables such as output and employment are unaffected by changes in the nominal variable of money. Therefore, a change in monetary policy will only affect nominal variables such as inflation and nominal interest rates, but will have no real effects on the economy in the long run.

If the Classical Dichotomy Holds a Change in Monetary Policy