Neutrality of money refers to
A)a one-time change in the money supply has a one-time change in economic activity.
B)a one-time change in the money supply has no real consequence for the economy.
C)a one-time change in the money supply affects consumption and investment decisions only.
D)money being a medium of exchange for everyone.
E)a certain percentage change in the money supply has the same percentage change in economic activity.

Question

Quizplus · Accepted Answer

Neutrality of money means that changes in the money supply do not affect real economic variables like output, employment, and productivity in the long run. The only consequence of a change in the money supply is a proportional change in the price level. In other words, the real value of money is independent of its nominal quantity. This is based on the assumption that prices and wages adjust perfectly and instantaneously to changes in the money supply so that relative prices and relative incomes remain constant. However, in the short run, changes in the money supply can affect the real economy through their impact on interest rates, exchange rates, and expectations.

Neutrality of Money Refers to