If restrictive monetary policy leads to a lower price level but leaves real output, employment, and real interest rates unchanged, then
A)real money balances must be unchanged
B)it must have been accompanied by expansionary fiscal policy
C)it must have been accompanied by restrictive fiscal policy
D)money is said to be neutral
E)both A)and D)

Question

Quizplus · Accepted Answer

If real output, employment, and real interest rates remain unchanged, then real money balances must also remain unchanged. This is because the demand for money is not affected by changes in output, employment, or interest rates in the short run. Additionally, if the lower price level is solely due to restrictive monetary policy, then money is said to be neutral, as changes in the money supply have no real effect on output, employment, or real interest rates in the long run.

If Restrictive Monetary Policy Leads to a Lower Price Level