Suppose the classical dichotomy holds in the short run as well as in the long run. That
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Suppose the classical dichotomy holds in the short run as well as in the long run. That is, suppose inflation is not sticky but rather adjusts immediately to changes in the money supply.
(a) What effect would changes in the nominal interest rate (or the money supply) have on the economy?
(b) What effect would an aggregate demand shock have on the economy?
(c) What about an inflation shock?
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The term classical dichotomy refers to the ability to fully examine real variables such as output an...View the full answer
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