6 Questions
In the classical theory of money, what does the assumption about aggregate supply (AS) being constant imply?
Total output remains the same regardless of changes in price levels
How does the classical theory explain the relationship between prices and wages?
Any increase in prices leads to a proportional increase in wages
According to the classical theory, how is the equilibrium point determined?
By the supply side, as supply creates its own demand
What happens when the aggregate demand (AD) shifts from AD1 to AD2 according to the classical theory?
It increases prices from P1 to P2
What is the significance of the gap between Y1 and Y2 in the classical theory?
It signifies an inflationary gap
How does the classical theory explain the flexibility of prices and wages?
Prices and wages are completely flexible and can be determined by market forces
Learn about the assumptions of the classical theory regarding aggregate supply, including the constancy of aggregate supply represented by a vertical line, flexible prices and wages determined by market forces, and the impact of changes in aggregate demand on the economy.
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