Question

Discuss the meaning of “monetary neutrality.” In the SV version of the Classical Model, is this true in the short-run, long-run, never, or always?

Answer 1

Neutrality of money is the theory that believes in the real effects of growth of money. The theory proposes that the money seems to be neutral in the long run because it has no real affect or it failes to change the real variables from their long run values. This argument is based on the view that monetary changes have no impact on output and income in the long run. Hence money neutrality is generally a long run phenomenon and money can affect the real variables in short run but not in the long run. Hence, when money supply is increased in the long run, all the increase in absorbed by the price level keeping the output level unchanged.