In the long run, the key reason that money is neutral is that
A)the federal budget is balanced.
B)prices are flexible.
C)business cycles have become much milder.
D)the nominal interest rate must equal the real interest rate.

Question

Quizplus · Accepted Answer

Money is neutral in the long run because prices are flexible. This means that in the long run, changes in the money supply only affect nominal variables such as prices and wages, not real variables such as output and employment. As prices adjust to changes in the money supply, the real value of money remains constant, and the economy eventually returns to its long-run equilibrium. This is known as the classical dichotomy.

In the Long Run, the Key Reason That Money Is