Classical dichotomy

The classic dichotomy in classical macroeconomic theory, the dichotomy of the real and monetary sectors of an economy.

After that, the price level on the money market is determined while the real economy (eg employment, real income, real interest rate ) on the other three markets ( goods market, labor market, capital market ) are determined.

The idea is that price level effects long term uniformly affect all expressed in monetary units real economy so that economic agents have no reason to change their real economic dispositions. Examples: With rising wage rate, thus increasing wage income households will not change their labor supply if the price of consumer goods by the same percentage increase, so that the real income remains the same. Companies increase their sales prices are not yet invest in addition, even if the wages and nominal interest rates (ie the costs) rise in exactly the same degree, etc.

The price level is in this view, long-term determined solely by the money supply according to the quantity theory of money, but has no permanent real effect (money veil ). This position is contrary to, inter alia, Keynesian macroeconomics, are in the real and monetary sectors interrelated.