Monetary neutrality is
A) when a central bank acts to increase the money supply.
B) when a central bank acts to decrease the money supply.
C) the short-run inverse relationship between inflation and unemployment rates.
D) the combination of high unemployment and high inflation.
E) the idea that the money supply does not affect real economic variables.

Question

Quizplus · Accepted Answer

Monetary neutrality refers to the idea that changes in the money supply do not affect real economic variables, such as real GDP or unemployment. Therefore, option E is the correct choice as it explains the concept of monetary neutrality. Choices A and B are incorrect because they relate to actions taken by a central bank, whereas monetary neutrality is a theoretical concept. Choice C refers to the Phillips curve, which shows a short-run inverse relationship between inflation and unemployment rates, but this is not related to monetary neutrality. Choice D refers to stagflation, which is a situation where there is a combination of high unemployment and high inflation, but again, this is not related to monetary neutrality.

Monetary Neutrality Is