a. the price level and nominal wages; b. the price level, but not the nominal wage. It implies that the central bank does not affect the real economy (e.g., the number of jobs, the size of real GDP, the amount of real investment) by creating money. Question 6 (1 point) According to the classical dichotomy, when the money supply doubles, what also doubles? Recall that, as real variables the unit of account, money is the yardstick we use to measure economic transac tions. understanding the underlying meaning of this classical dichotomy, we take an example. In other words, if you double the money supply, each currency unit is worth 50% less. The Neutrality of Money. Thus, this would lead to the role of money as being a medium that makes the exchange of commodities more efficient and simpler. a. the price level and nominal wages b. the price level, but not the nominal wage c. the nominal wage, but not the price level d. neither the nominal wage nor the price level ANS: A . Money Supply, Money Demand, and Monetary Equilibrium C. The Effects of a Monetary Injection D. A Brief Look at the Adjustment Process E. The Classical Dichotomy and Monetary Neutrality F. Velocity and Let us suppose there are two goods: wheat and potato whose nominal prices are ` 10.00 per kg and ` 15.00 per kg respectively (or, their real price ratio is 1.5 units of wheat: 1 unit of potato). They all increase equally. Quick Reference. According to the classical dichotomy, when the money supply doubles, which of the following also doubles? a) Prices. If the money supply increases, Hume et al. Join now. The view in classical economics and neoclassical economics that real variables in the economy are determined purely by real factors and not by monetary factors, and nominal variables are determined purely by monetary factors and not by real ones. According to the classical dichotomy, when the money supply doubles, which of the following also double? This is the essence of the quantity theory of money. all real variables – including relative prices – If the central bank doubles the money supply, the price level will double too. Classical dichotomy is a view of classical economics that presumes that output, employment, and other such factors which are termed real variables, must be independent of financial variables. References. classical dichotomy. • If the quantity of money in the economy were to double, prices would double and so would incomes. Instead, any increase in the supply of money would be offset by a proportional rise in prices and wages. The following questions test your understanding of this distinction. 3.7 and 3.8. Multiple Choice . all real variables—including relative prices—will remain unchanged. Ask your question. 8.According to the classical dichotomy, when the money supply doubles, which of the following also doubles? C. Classical dichotomy D. Money multiplier 45. 17. Effectiveness of monetary policy B. We have seen how changes in the money supply lead to changes in the average level of prices of goods and services. b) Output. • HOWEVER: These changes will not occur instantaneously. In this regard any increase of money supply, as reflected by Fisher, would be transposed into a generalised increase of prices, not into production surplus (Snowdon & Vane, 2005, pp.69-70). In the short run, changes in the money supply can cause changes We say more about monetary policy later, but notice that there are immediate implications for the conduct of monetary policy: Monetary Neutrality is the change in the money supply that have no effect on real economic variables such as output, real interest rates and unemployment. Classical Theory of Inflation A. The classical dichotomy and the neutrality of money. A)the real prices B)the nominal interest rate C)the real GDP D)the nominal GDP. 9.Monetary neutrality implies that an increase in the quantity of money will A.increase employment. 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