Which of the following statements about the relationship between money, prices, and exchange rates in the long run is NOT correct?
A) Since money is neutral in the long run, real income growth has no effect on inflation or the nominal exchange rate for a nation.
B) The rate of growth of prices (inflation rate) = the difference between money growth and real income growth.
C) The rate of depreciation of the nominal exchange rate between one nation and another is directly related to the difference in the inflation rates in the nations.
D) When a nation's real income grows, its inflation rate decreases.

Question

Quizplus · Accepted Answer

A) The statement that real income growth has no effect on inflation or the nominal exchange rate in the long run is incorrect because money neutrality implies that changes in the money supply only affect nominal variables (like the price level and nominal exchange rates) in the long run, not real variables like real income. However, this does not mean that real income growth has no effect on inflation or nominal exchange rates; rather, it suggests that changes in the money supply do not have long-term effects on real income.

Which of the Following Statements About the Relationship Between Money