Classical Theory of Money: Aggregate Supply
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Questions and Answers

According to the classical theory of money, how is the aggregate supply (AS) represented?

  • As a vertical line indicating constant total outputs regardless of price levels (correct)
  • As a downward-sloping line indicating decreasing total outputs with increasing price levels
  • As a horizontal line indicating constant price levels regardless of total outputs
  • As an upward-sloping line indicating increasing total outputs with increasing price levels

    • What does the classical theory assume about the flexibility of prices and wages?

  • They are flexible only in the short run but not in the long run
  • They are completely flexible and can be determined by market forces (correct)
  • They are rigid and cannot be determined by market forces
  • They are completely inflexible and determined by government regulations

    • How does the classical theory explain the impact of changes in aggregate demand (AD) on prices and wages?

  • Changes in AD have no impact on prices and wages
  • Changes in AD only impact prices but not wages
  • Changes in AD can impact prices and wages without changing aggregate supply (AS) (correct)
  • Changes in AD can impact aggregate supply (AS) without impacting prices and wages

    • What is meant by 'there is no money illusion' according to the classical theory?

    <p>Changes in prices lead to corresponding changes in wages due to no money illusion</p> Signup and view all the answers

    In the classical theory, what is indicated by 'supply creates its own demand'?

    <p>The supply of goods generates its own demand for those goods</p> Signup and view all the answers

    According to the classical theory, how do changes in demand curve upward affect the level of output (real GDP)?

    <p>Changes in demand curve upward do not affect the level of output (real GDP)</p> Signup and view all the answers

    According to the classical theory, what happens to the aggregate supply (AS) when there is a change in the aggregate demand (AD)?

    <p>AS remains constant regardless of changes in AD</p> Signup and view all the answers

    How does the classical theory explain the impact of changes in prices on wages?

    <p>An increase in prices leads to an automatic increase in wages</p> Signup and view all the answers

    In the classical theory, what is the role of aggregate supply (AS) in determining the equilibrium point?

    <p>AS creates its own demand to reach equilibrium</p> Signup and view all the answers

    What is the effect of an upward shift in the demand curve on the level of output (real GDP) according to the classical theory?

    <p>The level of output remains unchanged due to the constant AS</p> Signup and view all the answers

    What happens when the aggregate demand (AD) shifts from AD1 to AD2 according to the classical theory?

    <p>Prices increase from P1 to P2 resulting in labor demanding higher wages</p> Signup and view all the answers

    How does the market correct itself according to the classical theory?

    <p>Market corrects itself by adjusting prices and wages</p> Signup and view all the answers

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