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 the aggregate demand curve to the right

Hint:

In classical economics, an increase in the nominal money stock shifts the aggregate demand curve to the right, but output remains at its potential level.

Answer 1

The Correct Option is D

Step 1: Understanding classical economics.
In classical economics, the increase in the nominal money supply leads to an increase in the aggregate demand (AD) curve to the right. This is because more money in the economy raises consumption and investment, thus shifting AD to the right.

Step 2: Analysis of options.
- (A) An increase in output: In classical economics, the economy is always at full employment, so an increase in the money stock does not directly increase output.
- (B) Shift in aggregate demand curve to the left: This is incorrect. An increase in the nominal money supply shifts AD to the right, not to the left.
- (C) No change in the price level: Classical economics assumes that the price level is flexible and will adjust to changes in the money supply.
- (D) Shift in the aggregate demand curve to the right: This is correct. An increase in the money supply increases consumption and investment, which shifts the AD curve to the right.

Step 3: Conclusion.
The correct answer is (D), as the increase in the money supply shifts the aggregate demand curve to the right in classical economics.