OF CENTRAL PUNJAB
FINANCIAL ECONOMICS
CLASSICAL DICHOTOMY
SUBMITTED BY:
EMAD TABASSAM
L1F14MSFN0002
SUBMITTED TO:
DR. GHULAM SAGHIR
CLASSICAL DICHOTOMY
The classical dichotomy state that the real variables, like output &
employment, are independent of monetary variables. In this view, the primary
function of money is to act as a emollient for the efficient production and exchange
If the interest rate is set low and is followed suit with appropriate fiscal policy via
aggregate demand management, any so-called burden of private and public debt
accumulation is sustainable, and, as a result, provides impetus for output and
employment expansion.
The classical dichotomy suggests that real variables and monetary variables
are independent of each other. From a unorthodox perspective, by contrast, both
kinds of variables are explained by the relationship established between the central
bank, bank lending, and entrepreneurs animal spirits every time effective
demand is deemed profitable, reversing thereby the causality of the quantitytheory-of-money formula.