Question

1. Economists believe in the “Long-run neutrality of money”; what does that mean? If monetary policies help in the short run but do not help in the long run, should we not bother with those policies? What does this tell you about the current monetary policies of the Fed?

2. Application 3 in Chapter 15 (page 324) suggests increased health care expenditures will crowd out other expenditures. What component of GDP do you think will suffer? Using that same argument, Nebraska frequently debates legalizing casino gambling. Proponents say the additional entertainment dollar expenditures will be great for the economy. Opponents say it will only crowd out the entertainment expenditures elsewhere. Without debating the merits of gambling itself, which position do you take?

3. If you had to choose, would you say you side more with the Classic economists' viewpoint or the Keynesian economists' viewpoint? Explain at least three reasons why.?

Answer 1

1)

The neutrality of money implies that change in the money supply does not affect the real variables such as real output, employment , investment etc. Only nominal variables get changed.

Over the short run, the money is not neutral , the increase in the money supply leads to the rise in employment levels and the real output level. The some money supply is not neutral over the short run. Over the long run money is neutral. increase in money supply would lead to proportionate rise in price levels and real output level remains unaffected.

presently monetary policy is operated by the federal Reserve and federal Reserve is following the expansionary monetary policy to increase the aggregate demand in the economy. The covid-19 has led to the falls in the aggregate demands in economy. The expansionary policies of federal Reserve would lead to rise in the aggregate demand and the money supply would affect the real variables positively. Hence, money is not neutral over the short run.