Question

What is monetary neutrality and non-neutrality? When does each apply?

Answer 1

Money is considered to be neutral in the long run and non neutral in the short run. this is based on the fact that money is able to change real variables in the short run but it is ineffective in bringing any change to real variables in the long run.

for example when money supply is increased in the short run when prices are flexible, decline in the rate of interest shifts the aggregate demand curve to the right in the goods market. this increases real GDP which is a real variable and therefore money is considered to be non neutral in short run

however in the long run real GDP comes back to its full employment level which implies that in the long run economy adjust itself to the extent that there is no effect of monetary policy in the long run on any real variable. In the long run money is considered to be neutral..