Which of the following is a characteristic of the 'Classical Dichotomy'?
A. Real and nominal variables are always interdependent
B. Money affects real output in the long run
C. Real and nominal variables are determined separately and money is neutral
D. Only fiscal policy is neutral
Answer: Option C
Solution (By JKSSB Mock Tests)
The classical dichotomy is the proposition that real variables (output, employment, relative prices) are determined independently of nominal variables and that money is neutral in the long run.
Explanation:
The primary functions of money are medium of exchange, measure of value (unit of account), store of value and standard of deferred payments. Means of production is not a function of money.
Explanation:
The time preference theory of interest (associated with Böhm-Bawerk and others) explains interest as arising from the preference for present goods over future goods.
Explanation:
The semi-strong form of the efficient market hypothesis asserts that stock prices adjust rapidly to all publicly available information, so that neither technical nor fundamental analysis can yield abnormal returns.
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