Although it fell out of favor in the 1930s, many classical principles remain important to modern macroeconomic theories, especially aggregate market (ASAD) analysis, rational expectations theory, and supplyside economics. Classical economics can be traced to the pioneering work of Adam Smith (often referred to as the father of economics).
a. According to classical theory, changes in the quantity of money affect nominal variables such as the price level, but not real variables such as output. b. If the Fed decreases the money supply, aggregate demand shifts to the left. In the short run, output and the price level decline.