Neutrality of money

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juliusSchool of Salamanca

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Neutrality of money. 1 connected concept: Quantity theory of money (related to).

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Community · Velocity of money

Key points5

Money is considered neutral when it only affects nominal variables.
It posits that real variables like employment and GDP remain unaffected by money supply changes.
The concept is closely linked to the classical dichotomy in economic theory.
In the long run, money is widely accepted as being neutral.
Price stickiness can cause money to have non-neutral effects in the short term.

Summary

Neutrality of money is the idea that a change in the money supply affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption.

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Connections1

Related toQuantity theory of money90%
theoretical implication of the quantity theory
The quantity theory often assumes the neutrality of money, which posits that changes in the money supply only affect nominal variables like prices rather than real variables like output.
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Overview

The neutrality of money is a core concept in classical economics suggesting that changes in the money supply only affect nominal variables, such as prices and wages, without altering real economic outcomes. Under this theory, an increase in the supply of money is expected to be offset by a proportional rise in price levels, leaving real GDP and employment levels unchanged.

While this assumption is a staple of many macroeconomic models, it is generally considered to hold true only in the long run. In the short term, phenomena such as price stickiness can cause changes in the money supply to have temporary, tangible effects on real variables like employment and consumption.

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SourcesWikipedia

Facts