If an increase in the level of the money supply results in a proportionate increase in prices with no effect on any real variables, we say that
A) the Fisher relationship holds.
B) money is neutral.
C) money is superneutral.
D) money is the most preferred store of value.
E) money demand is neutral.

Question

Quizplus · Accepted Answer

When an increase in the level of the money supply results in a proportionate increase in prices with no effect on any real variables, we say that money is neutral. This means that changes in the money supply do not affect real economic variables such as output, employment, or economic growth, but only affect the general level of prices. This concept is central to the classical quantity theory of money, which states that changes in the money supply have a direct and proportional effect on the price level. The Fisher relationship refers to the nominal interest rate being equal to the real interest rate plus the expected inflation rate, while money superneutrality refers to the idea that changes in the money supply have no effect even in the long run. Money demand neutrality is a separate concept referring to the idea that the demand for money is only affected by changes in interest rates and income, not changes in the money supply.

If an Increase in the Level of the Money Supply