Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:
A) both the short run and the long run.
B) in neither the short run nor the long run.
C) in the short run, but not in the long run.
D) in the long run, but not in the short run.

Question

Quizplus · Accepted Answer

Monetary neutrality means that changes in the money supply have no impact on the real economy in the long run. In the short run, changes in the money supply may affect output and prices, but in the long run, prices and wages adjust to fully reflect changes in the money supply, resulting in no real effects. Therefore, monetary neutrality holds only in the long run, not in the short run.

Monetary Neutrality Is a Characteristic of the Aggregate Demand-Aggregate Supply