Question

In the case of classical economics, an increase in the nominal money stock causes

• A. An increase in output
• B. Shift in aggregate demand curve to the left
• C. No change in the price level
• D. Shift in aggregate demand curve to the right

Hint:

In classical economics, changes in the nominal money supply primarily affect the price level, not real output. An increase in money supply shifts the aggregate demand curve to the right.

Answer 1

The Correct Option is D

In classical economics, it is believed that the economy is self-adjusting, and changes in the nominal money supply only affect prices in the long run, rather than output. An increase in the nominal money stock increases the amount of money in circulation, which in turn shifts the aggregate demand curve to the right, causing an increase in the price level. - (A) An increase in output: In classical economics, an increase in the money stock does not lead to an increase in output in the long run because the economy is assumed to be at full employment.
- (B) Shift in aggregate demand curve to the left: This is incorrect. An increase in the nominal money stock shifts the aggregate demand curve to the right, not to the left.
- (C) No change in the price level: This is incorrect. According to classical economics, an increase in the money supply leads to higher prices in the long run.
- (D) Shift in aggregate demand curve to the right: This is the correct answer. An increase in the nominal money stock leads to an increase in aggregate demand, shifting the aggregate demand curve to the right, which results in higher prices in the economy.
The correct answer is (D), as an increase in the nominal money stock leads to a rightward shift in the aggregate demand curve in classical economics. Final Answer: (D) Shift in aggregate demand curve to the right.