10. How does the classical model make a theory of inflation out of an accounting identity?

This one is straight out of the transparencies. Check the section on the classical money market. The identity is MV=PY, which is true by definition. The classical model turns this into a theory by making assumptions about various components of the identity. First, the classical model assumes that Y is determined in the labor market. Then, it assumes that V is fixed. Thus, the identity is converted into a theory that relates the supply of money to the price level. 
This theory is testable in several ways. First, one could test whether M and P are in fact related as the theory predicts (we looked at a couple of graphs regarding this issue). Second, we see if V is indeed constant. Third, we could test whether Y is in fact unrelated to M or P