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Which of the following is true about the classical dichotomy? A. Inflation will influence the interest...

Which of the following is true about the classical dichotomy?
A. Inflation will influence the interest rate and investment
B. Inflation will influence the interest rate but not equilibrium investment
C. Inflation reduces the equilibrium level of employment
D. Inflation is the main cause of business cycles
E. Both A and C

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Answer #1

Answer : The answer is option A.

There exists an inverse relationship between inflation and interest rate. When inflation level increase then interest rate decrease. At lower interest rate people save less and spend more on consumption and investment. On the other side, if inflation level decrease then interest rate increase. At higher interest rate people save more and spend less on consumption and investment. So, inflation influence both interest rate and investment. Therefore, option A is correct.

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