The classical dichotomy implies that in the long run money affects which variables?

• A. Real GDP and unemployment
• B. Only nominal variables
• C. Both real and nominal variables
• D. Neither real nor nominal

Answer: (B)

The main idea here is that money is neutral in the long run according to the classical dichotomy. This means changes in the money supply don’t alter real variables like real GDP or the unemployment rate; those are determined by real factors such as technology, resources, and preferences. What money does affect in the long run are nominal variables—things like the price level, inflation, and nominal wages. So when the money supply changes, real output and employment stay the same in the long run, while nominal measures move. That’s why the correct interpretation is that money affects only nominal variables.