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According to the classical model, money is neutral. What does money neutrality imply and what are...

According to the classical model, money is neutral. What does money neutrality imply and what are the key assumptions that lead to the neutrality of money?

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Answer #1

Money neutrality means that a change in the money supply in the market will only affect the nominal value like the wages, price of the goods but the real values in the economy like the real wages, output and the employment will remain the same as it was before.

Key assumption here are than the wages, price and interest rate in the market are flexible and adjust quickly in the market to clear the equilibrium, the velocity of the money and the output in the long run will remain constant and will not change.

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