Question

According to the classical theory of inflation, an increase in the money supply would cause _____ to shift to the _______. Output would and price level would _____. However, in the long run, would shift to the ______. Output would and the price level would ______.

Answer 1

Answer:

According to the classical theory of inflation, an increase in the money supply would cause aggregate demand curve to shift to the right. Output would increase and price level would increase. However, in the long run,  aggregate demand curve would shift to the left. Output would reduce and the price level would continue to increase.

Explanation:

An economy can only experience a persistent rise in the price of goods and services when the price of goods and services increases, as well as the demand for these goods and services. When we take a look at the classical theory of inflation we discover how we determine the aggregate price level by the communication between the demand and supply of money.

Answer 2

Answer:

According to the classical theory of inflation, an increase in the money supply would cause aggregate demand curve to shift to the right. Output would increase and price level would increase. However, in the long run, would shift to the left. Output would reduce and the price level would continue to increase.

Explanation:

Inflation occurs in an economy when the overall price level increases and the demand of goods and services increases.

the classical theory of inflation explains how the aggregate price level gets determined through the interaction between money supply and money demand.

Tn the classical theory of inflation:

• Money is considered the asset which is utilized by people to purchase goods and services on a regular basis.
• Their view is that the general price is determined by the total demand for and total supply of goods just as the price of any good is determined by the forces of demand and supply for it.
• According to them inflation is a situation caused by excess demand, in which the total demand for goods as measured by the volume of money offered is in excess of supply of goods at prevailing prices.