Question

According to classical macroeconomic theory, changes in the money supply affect: _________.(i) nominal variables, but not real variables.(ii) nominal variables and real variables. (iii) real variables, but not nominal variables.(iv) neither nominal nor real variables.

Answer 1

Answer: .(i) nominal variables, but not real variables

Explanation:

According to classical macroeconomic theory, changes in the money supply affect the nominal variables but the real variable are not affected.

According to the classical macroeconomic theory, it us believed that an increase in money supply will result into a rise in the availability of money in the market, thereby increasing consumers spending which will also lead to a rise in aggregate demand which in turn, causes inflation.

Thereby the nominal variables will be changed.