What is classical dichotomy?
Understand the Problem
The question is asking for an explanation of the concept of classical dichotomy in economics, which refers to the separation of real and nominal variables in the economy.
Answer
Real and nominal variables are independent.
Classical dichotomy is an economic concept suggesting that real variables and nominal variables in an economy can be analyzed independently.
Answer for screen readers
Classical dichotomy is an economic concept suggesting that real variables and nominal variables in an economy can be analyzed independently.
More Information
This concept is based on classical and pre-Keynesian economics, highlighting a clear separation between the impact of monetary policy on prices and its non-impact on real economic factors like output and employment.
Tips
One common mistake is assuming that changes in the money supply directly affect real variables like output or employment, which the classical dichotomy asserts they do not.
Sources
- Classical dichotomy - Wikipedia - en.wikipedia.org
- Classical dichotomy - Oxford Reference - oxfordreference.com
- Classical Dichotomy Definition in Macroeconomics - Quickonomics - quickonomics.com
