Question

Why do many economists believe that changes in the Money supply affect the economy in the short run but not in the long run?

Answer 1

This is because of neutrality of money.

In the long-run, money can only impact on price level and wages but it has no impact on the output level or economic structure as a whole. In the short-run, money can impact on output level because a sudden increase in money supply increases purchasing power of consumers but that can’t be matched with increasing supply of goods because of limited resources, causing inflationary gap; this thing adjusted in the long-run, since there is no limit of resources (all factors become variable) – therefore, there is no effect in the long-run.