Classical Theory of Money: Lecture Two
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Questions and Answers

According to the text, what is another name for the classical theory of the price level?

  • The equilibrium theory
  • The quantity theory of money (correct)
  • The modern theory of inflation
  • The demand and supply theory

    • Why is it important to study the classical theory of money despite its age?

  • It helps in understanding the causes of inflation in developing countries.
  • It helps in understanding how households and firms vary their demands and supplies for labor over time. (correct)
  • It is the only theory applicable to high-inflation countries.
  • It provides a clear explanation of modern equilibrium theories.

    • What is the main focus of the classical explanation for inflation?

  • Household consumption patterns
  • The quantity of money in circulation (correct)
  • Government policies
  • High-income inequality

    • According to the text, where can the classical theory of money be especially effective?

    <p>In high-inflation countries</p> Signup and view all the answers

    Which economist's work can be considered as an early version of the classical theory of money?

    <p>David Hume</p> Signup and view all the answers

    What does the classical theory of aggregate demand build upon?

    <p>The quantity theory of money</p> Signup and view all the answers

    According to the classical theory of aggregate demand and supply, what is the main function of money?

    <p>Determining the general level of prices</p> Signup and view all the answers

    What is the equation representing the quantity theory of money in the classical system?

    <p>MV=PT</p> Signup and view all the answers

    In the classical system, what does the equation MV=PT indicate?

    <p>Total money supply equals the total value of output</p> Signup and view all the answers

    According to the quantity theory of money, what does a change in M cause?

    <p>A proportionate change in P</p> Signup and view all the answers

    What is the concept of neutrality of money in the classical system based on?

    <p>The idea that money plays no role in determining employment, income, and output</p> Signup and view all the answers

    What happens to commodity prices when there is an increase in the quantity of money according to the classical theory?

    <p>Rises in proportion to the rise in M</p> Signup and view all the answers

    In the classical system, what happens to the real wage rate when there is an increase in the price level?

    <p>Tends to decrease</p> Signup and view all the answers

    According to the classical system, what determines employment, income, and output?

    <p>Labor, capital stock, state of technology, etc.</p> Signup and view all the answers

    What effect does an increase in the quantity of money have on effective demand according to the classical theory?

    <p>Leads to a rise in effective demand</p> Signup and view all the answers

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