classical dichotomy

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The view in classical economics and neoclassical economics that real variables in the economy are determined purely by real factors and not by monetary factors, and nominal variables are determined purely by monetary factors and not by real ones. This view is rejected by Keynesian and monetarist economics, mainly through the argument of sticky prices: if prices fail to adjust in the short run, an increase in the money supply raises aggregate demand and thus alters real macroeconomic variables.

Subjects: Economics.

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