Classical Theory of Money: Lecture Two

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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?

In high-inflation countries Signup and view all the answers

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

David Hume Signup and view all the answers

What does the classical theory of aggregate demand build upon?

The quantity theory of money Signup and view all the answers

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

Determining the general level of prices Signup and view all the answers

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

MV=PT Signup and view all the answers

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

Total money supply equals the total value of output Signup and view all the answers

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

A proportionate change in P Signup and view all the answers

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

The idea that money plays no role in determining employment, income, and output 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?

Rises in proportion to the rise in M 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?

Tends to decrease Signup and view all the answers

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

Labor, capital stock, state of technology, etc. 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?

Leads to a rise in effective demand Signup and view all the answers

Classical Theory of Money: Lecture Two

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