According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

(A) the price level.

(B) nominal wages.

(C) Both a and b double.

(D) Neither a nor b double

Answer: Option (C) is correct.

Explanation:

Correct option: The price level and nominal wages.

According to the classical dichotomy, nominal variables moves proportionately with the quantity of money whereas real variables remains unchanged.

A classical model that is based on the flexibility of prices and wages, conclude that any changes in money supply only affects the nominal variables whereas real variables remains constant. This theory results in the independence of the real variables from any changes in the money supply and nominal variables.