Classical Monetary Theory

Classical Monetary Theory is an economic framework that emphasizes the role of money in the economy. It suggests that changes in the money supply primarily influence price levels rather than output or employment in the long run. According to this theory, if the money supply increases, prices will eventually rise proportionately, leading to inflation. The theory assumes that markets are generally efficient and that individuals and businesses act rationally in response to changes in money supply. Overall, it underscores the importance of managing the money supply to maintain price stability in the economy.