According
to Investopedia, “the neutrality of money is based on the idea that changing
the money supply will not change the aggregate supply and demand of goods,
technology or services” (Investopedia, 2014). Although, when talking about the
neutrality of money, through a modern-day perspective, this does not
necessarily completely apply in all financial markets alone. Also, when the
prices and wages increase, so does the money supply (Investopedia, 2014).
Looking at
a short-term period for the neutrality of money, this is when it affects
employment levels and GDP, which can be considered real variables. Though, if
it is in a long-term then it is simply considered to be a plausible scenario
(Investopedia, 2014).
When
talking about the neutrality of money, the effects of monetary policy in the long
run as well as in the medium run. This happens because increases in the nominal
money has an effect and makes an equal increase in the price level as well
(Quizlet, 2014). Monetary policy then has no effect on its interest rate or its
output during the time of the medium run. While, Monetary policy, in the short
run, involves recovery within the recession as well as not allowing the economy
to grow too fast (Quizlet, 2014).
Inflation
is one of the only things that the growth rate of money will influence in the
medium run. Also, if output is enthused
too long, then money growth is then at a fast rate, which means that the high
level of inflation will just get you punished (Mnmecon, 2011). Another example
is that if an economy that we are in is constantly increasing and growing over
a period of time as well as the increase in supply, then the natural rate of
growth for output is happening (Mnmecon, 2011).
One quote
that was stated by Milton Friedman was, “ inflation is always and everywhere a
monetary phenomenon.” This deals with the concept that inflation depends only
on the money growth rate within the medium up, as well as the less you worry
about uncontrollable inflation if you have a good hand on monetary policy
(mnmecon, 2011).
As talked
about before, in the short run, monetary policy deals with the different
effects on unemployment as well as output. When output, also known as economy,
is increasing or growing, then the rate of money growth begins to increase
right about output growth, which means overall that the output will rise way
more than growth; dealing with the ISLM model (mnmecon, 2011).
Neutrality
of money is a big attribute of importance in monetary policy because it deals
with the rate of growth for money supply, which can influence unemployment and
a tool of output, although, can have no influence upon the medium run (mnmecon,
2011).
Stated in
the Principles of Macroeconomics sixth edition textbook, they define monetary
neutrality as “the proposition that changes in the money supply do not affect
real variables (Mankiw, 2012). In the book, they talk about how it is describe
as a yardstick, in order to measure money for economic transactions and other
things (Mankiw, 2012). Although, it is not completely realistic, meaning that
there can be a variation and change of the length for the yardstick, which, of
course, can possibly lead to confusion and some mistakes added. Throughout
time, nominal variables are what are being affected by the variation and
significance of monetary change, in the long-un, meaning a decade. Overall, the
world can sometimes be at a confusing state, but when you are thinking about it
in the long run of the economy itself, then money neutrality can be a
beneficially positive thing.
Investopedia. (2014). Neutrality of money. Retrieved
from
Mankiw, G. (2012). Princples of macroeconomics. (6th
ed., p. 354). Mason, OH: South-
Western Cengage Learning.
Mnmecon. (2011, July 16). Monetary policy in the short
and medium run. Retrieved from
Quizlet. (2014). Chapter 7 questions. Retrieved from
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