Money & Banking Lecture Two: Classical Theory of Money
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Questions and Answers

What is another name for the classical theory of the price level?

  • Classical theory of aggregate supply
  • Quantity theory of money (correct)
  • Keynesian theory of inflation
  • Modern equilibrium theory

    • In which eighteenth-century economist's work can early versions of the classical theory be found?

  • Adam Smith
  • John Maynard Keynes
  • David Hume (correct)
  • Milton Friedman

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

  • To critique the flaws in the classical theory
  • To understand inflation in high-inflation countries
  • To comprehend the functioning of modern equilibrium theories (correct)
  • To analyze the impact of monetary policy on employment

    • According to the text, in which type of countries does the classical theory work well?

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

    What is another name for the classical explanation for inflation according to the text?

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

    Which theories build on the classical theory by being clear about the factors that lead households and firms to vary their demands and supplies for labor through time?

    <p>Modern equilibrium theories</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 for goods and services</p> Signup and view all the answers

    Which equation represents the quantity theory of money in the classical system?

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

    What does the quantity theory of money state about the price level?

    <p>It is a function of the supply of money</p> Signup and view all the answers

    In the classical system, what is the role of money in determining employment and output?

    <p>It is neutral and does not affect employment and output</p> Signup and view all the answers

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

    <p>They rise proportionally</p> Signup and view all the answers

    How does an increase in the quantity of money affect the money wage rate in the classical system?

    <p>It causes a rapid increase in the money wage rate</p> Signup and view all the answers

    What does the classical theory propose about the role of money in determining employment and output?

    <p>Money has no impact on employment and output</p> Signup and view all the answers

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

    <p>(Labor, capital stock, technology, natural resources, saving habits)</p> Signup and view all the answers

    What is the notion of neutrality of money in the classical system explained in terms of?

    <p>Fig. 1 illustrating equilibrium positions</p> Signup and view all the answers

    What does the quantity theory of money suggest about changes in the supply of money?

    <p>They cause immediate adjustments in price levels</p> Signup and view all the answers

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