Monetary neutrality refers to the fact that changes in the money supply
A)affect output more in the long run than in the short run.
B)have no effect on output in the long run.
C)affect only output in the long run.
D)have a greater effect on prices in the short run than in the long run.

Question

Quizplus · Accepted Answer

According to the classical dichotomy, changes in the money supply only affect nominal variables (such as prices), but not real variables (such as output) in the long run. Therefore, changes in the money supply have no effect on output in the long run, implying monetary neutrality. It should be noted that in the short run, changes in the money supply can affect output due to nominal rigidities, but this effect fades away in the long run.

Monetary Neutrality Refers to the Fact That Changes in the Money