What does "neutrality of money" mean?
The phrase of money neutrality concerns the economic theory that changes in the offer of money do not affect primarily real variable economies, such as employment or gross domestic production (GDP). As a concept, the neutrality of money since the 1920s is the principle of the classical economy. When the money is introduced into the economic system, prices and wages are rising proportionally, but the overall supply and demand for goods and services remain theoretically unchanged. Although the neutrality of money is valid for a long time in the economic system, imbalance produced in the economy by rapid increase or decreased money supply leads to short -term changes in employment, production and consumption. The new Keynesian economic models will impose the neutrality of money and point to a significant impact on the real economic variables that can have a loan and debt.
Long -term economic cycles reflect the neutrality of money, but in a short -term, infusion or subtraction of money cause changes at the level of employment, production of goods and consumer behavior. For example, excessiveThe offer of money can increase demand for goods and services and support more expenses. Since demand exceeds supply, prices have been increasing. Companies can then increase production and hire more employees to satisfy demand. Finally, the system arrives at a new balance, where supply and demand are exported to each other.
The amount of money states that there is a proportional relationship between prices and money offer. According to Fisher's equation, the theory states the amount of money (QTM) that as the money supply and the speed of money increases, prices and transaction volumes are also increasing. Based on this theory, monetarists advocate that the money supply is controlled in a narrow range to balance the opposing objectives of stimulation economics and control of inflation. Most monetarists prefer the gradual reduction of money supply over time to achieve an initial impact in productivity followed by deflationary effects of monetary contraction.
Although short -term effects of changes in monetary offer cause changes in real economic variables, prices and wage glue can undermine these effects. For example, even if the United States of Federal reserves, the United States prints more money, prices and wages may not increase due to different factors. Contacts of money supplies are not always accompanied by reducing wages and prices. The wage and prices complicate the decision -making process of the federal reserve system with regard to any interventions that it could perform to stimulate the economy.