Question

Explain the logic of the monetary neutrality and why changes in the quantity of money only affect nominal variables and not real variables. Do you agree that monetary neutrality approximates the behavior of the economy in the long run? Why or why not?

Answer 1

2 in the 1 worde o The necetrality of money theory claims that changes money supply affect the prices of goods, serrices and wages but not overall economic productivity. The logic behind the monetary neutrality is nominal variables are influenced by the monetary system in the economy, whereas money is for lack of better i relevant for cletermining real variables. changes in the quantity of mor oney only in offect nominal variables becacere it counts for a mewure of unit in dollars where as real variables are in physical units. increasing the money supply might decreases nominal interest rate, but have impact on the real interast rate. neural means that changes in the money supply have no impact variable in particular; real output. In the long rung real output will depend on and techology, not the money me cesured the it won't on one resources Supply CS Scanned with CamScanner

2 This means that money cepply. The and to changes in the price level Cand therefore the rate of intation) depend primarily on changes in them the money supply should gouw enough to support any increase in the natural rate of outpat. Cin other words, support economic growth, during severe downtum. However the money supply supply shouldn't be able wed the bwiness cycle. attemp to The amount of money printed centeral banks bare an impact on price and structure of wages beut not the output or the econ nomy. The they of money neutrality argues that changes in the money supply can only aftect nominal values such as wages price most economist agree that in the long sun money neurality does approximate the smooth our can and behaviour.o6 te economy, CS Scanned with CamScanner