Final answer:
Changes in nominal variables are influenced by the quantity of money and are determined by both the classical dichotomy and the quantity theory of money, which suggests a proportional relationship between money supply and nominal variables like the price level, given a constant velocity of money.
Step-by-step explanation:
Changes in nominal variables are mostly determined by the quantity of money and the monetary system according to both the classical dichotomy and the quantity theory of money. The classical dichotomy is the idea in classical economics that real and nominal variables can be separated, implying that nominal variables do not affect real outcomes like output or employment. On the other hand, the quantity theory of money is a theory suggesting that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.
The relationship between changes in the money supply and nominal variables is highlighted by historical patterns, where persistent changes in the money supply have predictable impacts on nominal GDP, assuming velocity is constant or changing in a predictable manner. However, if velocity is unpredictable, as it was during the 1980s, the relationship becomes less clear and more complex, ultimately leading to unpredictable changes in nominal GDP. This led central banks to adjust their focus from a strict money supply targeting to an approach responsive to the economic conditions of inflation and unemployment.