Final answer:
The classical dichotomy explains the idea that nominal variables are heavily influenced by the money supply, while real variables are not. It draws a clear line between the realm of real variables like real GDP, which is influenced by technology and resources, and nominal variables like nominal GDP, which is influenced by money supply and velocity of money. The correct answer is option: c) classical dichotomy.
Step-by-step explanation:
The idea that nominal variables are heavily influenced by the quantity of money, while money is largely irrelevant for understanding the real variables, is best explained by the concept of the classical dichotomy. The classical dichotomy is a principle from classical economics that suggests there is a clear distinction between real and nominal variables. Real variables, such as real GDP, unemployment, and productivity, are determined by factors such as technology and resources, while nominal variables, like the price level and nominal GDP, are influenced by the money supply.
Nominal GDP can be affected by changes in the velocity of money, but the impact on real GDP is generally considered independent in classical economics. The velocity of money is a concept used to describe the rate at which money circulates in the economy. If velocity is constant and the money supply increases, nominal GDP would be expected to rise proportionately. If the velocity is unpredictable, the effect on nominal GDP is also unpredictable. Interestingly, fluctuations in the velocity of money during the 1980s influenced central banks to adapt their monetary policy approaches.