Classic dichotomy

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The classical dichotomy in classical macroeconomic theory is the division into the real and the monetary sector of an economy .

Then the price level on the money market is determined, while the real economic variables (e.g. employment , real income , real interest rate ) are determined on the other three markets ( goods market , labor market , capital market ).

This is based on the idea that, in the long term, price level effects have an equal effect on all real economic variables expressed in monetary units , so that economic agents have no reason to change their real economic dispositions. Examples: With a rising wage rate and thus rising labor income, private households will not change the available gainful employment if consumer goods prices rise by the same percentage, so that real income remains the same. Companies whose sales prices rise will still not invest additionally if wages and nominal interest (i.e. costs) rise by exactly the same amount, etc.

In this perspective, the price level is determined solely by the money supply in the long term in accordance with the quantity theory of money , but has no lasting real effect ( money veil ). This position is u. a. the Keynesian macroeconomics contrary, in the real and monetary sector are interrelated.

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