The classical dichotomy refers to the separation of

Question

a.

prices and nominal interest rates.
b.

decisions made by the public and decisions made by the government.
c.

real and nominal variables.
d.

taxes and government spending.

Answer 1

The classical dichotomy refers to the separation of c. real and nominal variables. It suggests that in the long run, real variables (such as output and employment) are unaffected by nominal variables (such as money supply and price levels).