Question

According to the classical dichotomy, which of the following increases when the money supply increases?

Select one:
a. the real interest rate
b. real GDP
c. the real wage
d. None of the above increases.

Answer 1

According to the classical dichotomy, none of the listed variables increase when the money supply increases.

Step-by-step explanation:

According to the classical dichotomy, when the money supply increases, it does not affect the real interest rate, real GDP, or real wages. The classical dichotomy is a theory that suggests that changes in the money supply only affect nominal variables, such as prices and inflation, but do not impact real variables, such as output and employment.

For example, if the central bank increases the money supply, it may lead to higher inflation and an increase in the overall price level, but it will not directly influence real GDP or the real interest rate.

The correct answer is d. None of the above increases when the money supply increases, according to the classical dichotomy.