Final answer:
The concept that advocates the separation of real and nominal variables, emphasizing that nominal variables are mainly influenced by the quantity of money, is called the c. classical dichotomy.
Step-by-step explanation:
The concept that separates real and nominal variables, and states that nominal variables are heavily influenced by the quantity of money, while real variables are not, is known as the classical dichotomy. When the velocity of money is constant, a certain percentage rise in the money supply leads to the same percentage rise in nominal GDP, which can manifest as either an increase in inflation, an increase in real GDP, or a combination of both. However, if velocity changes unpredictably, the effect of money supply changes on nominal GDP also becomes unpredictable.
During the 1980s, fluctuations in the velocity of M1 money challenged the predictability of the quantity theory of money, leading central banks to shift their focus from controlling money supply growth to setting monetary policy based on inflation and unemployment indicators. This historical context demonstrates the real-world implications of the theory and the importance of central banks adapting to changing economic dynamics.