Asked by Navpreet singh on Jun 07, 2024
Verified
A conclusion of the classical macroeconomic model is that
A) the average price level is determined by the costs of production.
B) the average price level is determined strictly by the money supply.
C) changes in interest rates cause changes in the velocity of money.
D) sustained unemployment is unavoidable in a market economy.
Classical Macroeconomic Model
A theoretical framework in economics that emphasizes the role of free markets, flexible prices, and self-correcting mechanisms in the economy, largely based on the principles of classical economics.
Average Price Level
A measure that summarizes the prices of various goods and services in an economy at a specific time.
Money Supply
The sum of all financial assets within an economy at a given moment, encompassing both currency in circulation and the funds in checking and savings accounts.
- Elucidate the function and repercussions of the quantity theory of money in the realm of classical economics.
- Analyze the relationship between money supply, inflation, and economic stability.
Verified Answer
MD
Manpreet DhillonJun 13, 2024
Final Answer :
B
Explanation :
The classical macroeconomic model posits that the average price level in an economy is primarily determined by the money supply. According to this model, changes in the money supply directly affect price levels, aligning with the Quantity Theory of Money. This theory suggests that a change in the money supply will proportionally change the price level if the velocity of money and the level of output remain constant.
Learning Objectives
- Elucidate the function and repercussions of the quantity theory of money in the realm of classical economics.
- Analyze the relationship between money supply, inflation, and economic stability.