Question

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?

Homework Answers

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.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Describe the role of money in the economy according to the Classical model.
Describe the role of money in the economy according to the Classical model.
Discuss the meaning of “monetary neutrality.” In the SV version of the Classical Model, is this...
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?
1. According to classical macroeconomic theory, money supply shocks are “neutral.” a.Explain what this means. b.Based...
1. According to classical macroeconomic theory, money supply shocks are “neutral.” a.Explain what this means. b.Based on that theory, how would a 5% increase in a nation’s money supply affect its real 
wage rate (W/P), all else equal (up, down, or no change, and by how much)? 
 c. According to the quantity theory of money, how would a 5% increase in the money supply 
affect the price of goods and services (P), all else equal (up, down, or no change,...
The classical dichotomy and the neutrality of money The classical dichotomy is the separation of real...
The classical dichotomy and the neutrality of money The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction. Maria spends all of her money on paperback novels and donuts. In 2012, she earned $14.00 per hour, the price of a paperback novel was $7.00, and the price of a donut was $2.00. 1) Which of the following give the nominal value of a variable? Check all that apply. a)The price...
The classical dichotomy and the neutrality of money The classical dichotomy is the separation of real...
The classical dichotomy and the neutrality of money The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction. Rina spends all of her money on comic books and donuts. In 2011, she earned $15.00 per hour, the price of a comic book was $5.00, and the price of a donut was $3.00. Which of the following give the nominal value of a variable? Check all that apply. The price of...
True or False: Government spending can raise Aggregate Demand and real GDP in the Classical model....
True or False: Government spending can raise Aggregate Demand and real GDP in the Classical model. Classical economists said that the velocity of money is very volatile. Classical Economists claim interest rates guarantee that savings will equal investment. According to money neutrality, the Ms determines nominal but not real variables. According to Say’s Law, “demand creates its own supply”.
illustrate why money is non-neutral in the Keynesian Macroeconomic Model. What effect does a decrease in...
illustrate why money is non-neutral in the Keynesian Macroeconomic Model. What effect does a decrease in the money supply have on the economy?
1. In the Classical Model individuals only hold cash in order to satisfy the transactions demand...
1. In the Classical Model individuals only hold cash in order to satisfy the transactions demand for money. Explain. What does this imply as far as the market for goods and services is concerned? 2. With fully flexible wages, prices and interest rates the economy always settles at the full employment level of GDP. Explain. 3. What form of unemployment is consistent with the Classical Model? 4. Provide a brief explanation of the Quantity Theory of Money. 5. Why is...
According to the neutrality of money property, how does once-and-for-all increase in the aggregate quantity of...
According to the neutrality of money property, how does once-and-for-all increase in the aggregate quantity of money affect the interest rate i in the long run? Select one: a. Not enough information to answer the question. b. i increases c. It does not affect i d. i decreases 2. In the Solow Model with no technological changes, when capital depreciates faster than it is accumulated we may conclude that the capital stock per worker: Select one: a. will rise if...
(1)What are the ASSUMPTIONS of the Classical Model in econometrics? What happens when each of the...
(1)What are the ASSUMPTIONS of the Classical Model in econometrics? What happens when each of the assumptions are violated? Answers are provided in chapter 4 of the required text book for the class. The title of the chapter is “ The Classical Model”
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT