# Why does an increase in money cause a proportionate increase in price level according to classical/neoclassical economists?

First I am not sure what classical economists say but doesn't increase in Money supply decreases interest rate and cause investment to expand and thus GDP rises. Therefore the aggregate demand increase, causing price level to rise. But what does proportional mean in this case?

• So to sum up, your question is: What does the word 'proportional' mean? – Giskard Apr 9 '16 at 19:27

It's a bit hard to answer without a precise model structure, but normally an increase in money will propagate into an increase in nominal demand. For the sake of simplicity, suppose money is equivalent to nominal gdp $M$, whereas real gdp by definition is given by $Y=M/P$. In classical economics, real gdp is pinned down completely by fundamentals of the economy, so that accordingly $P\propto M$ (namely by a factor $1/Y$).

• if someone previously earned \$1000/week, they now earn \$1,000,000 per week,
• if something previously cost \$1, it now costs \$1,000