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Questions and Answers
In the classical theory of money, what does the assumption about aggregate supply (AS) being constant imply?
In the classical theory of money, what does the assumption about aggregate supply (AS) being constant imply?
- Total output increases as price levels increase
- Total output is determined by changes in aggregate demand
- Total output remains the same regardless of changes in price levels (correct)
- Total output decreases as price levels increase
How does the classical theory explain the relationship between prices and wages?
How does the classical theory explain the relationship between prices and wages?
- Prices and wages are completely independent of each other
- An increase in prices causes a decrease in wages
- Any increase in prices leads to a proportional increase in wages (correct)
- Changes in prices have no impact on wages
According to the classical theory, how is the equilibrium point determined?
According to the classical theory, how is the equilibrium point determined?
- Equilibrium point is determined only by changes in prices
- Equilibrium point is determined by changes in aggregate demand
- By the demand side, as demand creates its own supply
- By the supply side, as supply creates its own demand (correct)
What happens when the aggregate demand (AD) shifts from AD1 to AD2 according to the classical theory?
What happens when the aggregate demand (AD) shifts from AD1 to AD2 according to the classical theory?
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What is the significance of the gap between Y1 and Y2 in the classical theory?
What is the significance of the gap between Y1 and Y2 in the classical theory?
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How does the classical theory explain the flexibility of prices and wages?
How does the classical theory explain the flexibility of prices and wages?
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