6 Questions
According to the classical theory of money, what is the assumption about aggregate supply (AS)?
AS is constant and illustrated through a vertical line, regardless of price levels.
What role does supply play in the classical theory of money?
Supply generates money that drives demand, leading to market equilibrium.
How does the classical theory explain changes in prices and wages?
Changes in prices and wages are solely determined by market forces.
What happens when aggregate demand (AD) increases in the classical theory of money?
It makes some changes in prices and wages without affecting aggregate supply.
What is the significance of the gap between Y1 & Y2 in the context of the classical theory of money?
It indicates an inflationary gap caused by a decrease in prices.
How does the classical theory explain the determination of equilibrium in the market?
The market will correct itself towards full employment level based on changes in aggregate supply (AS).
Explore the assumptions of the classical theory regarding aggregate supply and the constancy of output regardless of price levels. Understand the flexibility of prices and wages as determined by market forces.
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