Classical Theory of Money: Aggregate Supply
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Questions and Answers

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?

  • 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?

  • 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?

    <p>It increases prices from P1 to P2</p> Signup and view all the answers

    What is the significance of the gap between Y1 and Y2 in the classical theory?

    <p>It signifies an inflationary gap</p> Signup and view all the answers

    How does the classical theory explain the flexibility of prices and wages?

    <p>Prices and wages are completely flexible and can be determined by market forces</p> Signup and view all the answers

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