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: Classical Economics Theory.
Classical economics posits that an expanded nominal money supply causes aggregate demand (AD) to increase, shifting the AD curve rightward. This occurs because increased money in circulation stimulates consumption and investment, thereby shifting AD to the right.

Step 2: Evaluation of Options.
- (A) Increased output: In classical economics, the economy operates at full employment. Consequently, an increase in the money stock does not directly lead to higher output.
- (B) Leftward shift of aggregate demand: Incorrect. An increase in the nominal money supply shifts the AD curve to the right, not left. - (C) Unchanged price level: Classical economics assumes the price level is flexible and adjusts to changes in the money supply. - (D) Rightward shift of aggregate demand: Correct. An increased money supply augments consumption and investment, leading to a rightward shift of the AD curve.

Step 3: Determination.
Option (D) is the correct answer, as an increase in the money supply results in a rightward shift of the aggregate demand curve within the framework of classical economics.