The classical dichotomy:
A) cannot hold if money is "neutral."
B) is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money.
C) fully describes the world in which we live, especially in the short run.
D) arises because money depends on the nominal interest rate.

Question

Quizplus · Accepted Answer

The classical dichotomy is the separation of real and nominal variables, where real variables are determined by economic forces independent of monetary forces, while nominal variables are determined by monetary forces. According to this concept, in the long run, changes in the quantity of money only affect nominal variables, and not real variables. Therefore, the values of real variables can be determined without any reference to nominal variables or the existence of money. This idea forms the basis of classical economics.

The Classical Dichotomy