How does rapid price adjustment, as assumed in classical models, result in separation of real from nominal variables (the classical dichotomy)?

What will be an ideal response?

If an increase in the money supply enables consumers and businesses to spend more, there is upward pressure on equilibrium prices. Producers will raise prices. They might consider increasing output, as well, but will reconsider when they see that labor and other inputs have increased in price. There will be no increase in saving, because the increase in the money supply is needed to fund the same volume of transactions at the higher price level. The nominal interest rate will rise, so long as the price level is expected to continue to rise. The real interest rate is unaffected, as are real output, consumption, and investment.