Question

Some economists believe that, in the long run, money is neutral. Explain what is meant by the “neutrality of money.” Identify and discuss the assumptions that lead to the neutrality of money. Critically analyze whether this outcome is consistent with the dual mandate of the Federal Reserve Bank.

Answer 1

Neutrality of money is the idea that a change in the stock of money affects only normal variable on in the economy such as prices, wages and exchange rates with no effect on consummation. Neutrality of money is an important idea for classical economy and is rated to the classical . It implies that the central bank does not effect the real economy (e.g no . of jobs size of real GDP, the amount of real investment)by earning money. Instead, any increase in the supply of money would be offset by proportional rise in prices and wages. This assumption underlies some mainstream macro economy models (e.g business cycle modules). Others like monetarism view money as being natural in the long run. When neutrality of money coincides with zero population growth the economy is said to rest in steady stare equilibrium.\r\n another belief among economy that justifies the unbalanced approach to the dual man date is the concept of money supply