8. According to classical economic theory, money is neutral: the money supply does not affect real variables.
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8. According to classical economic theory, money is neutral: the money supply does not affect real variables. Therefore, classical theory allows us to study how real variables are determined without any reference to the money supply. The equilibrium in the money market then determines the price level and, as a result, all other nominal variables.This theoretical separation of real and nominal variables is called the classical dichotomy.
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