Jon Paige Blog post #1 Monetary Policy and Neutrality

Jon Paige 

Econ 122

Dr. Kassens

 

 Money is neutral because it doesn't effect real economic outputs such as real GDP, unemployment rates, or the real prices. But with it being neutral it affects the nominal variables such as prices of goods and wages. The money supply can change the real outputs in the short term of things and make money not neutral. Long term though the money supply should not effect the real outputs in the long term. That is why the money is neutral because in the long term there should be no effect on the outputs.

Monetary policy is when the Federal Reserve can control the growth of the economy with the money supply being put into the banks across the country. With that being said, combination of neutrality and monetary policy can be useful because the Federal Reserve can increase or decrease the inflation rate without damaging the real variables in the long term by the money supply. But reason being for no long term effect on the real outputs is because by that point the goal of economic expansion or contraction will be achieved and the outputs will be stabilized to where it should be. Also once the economy is reached the expansion or contraction goal that is trying to be reached by the Federal Reserve the money becomes neutral again .In the short term the real outputs will be effected by the changes in money supply because time is needed for the economy work itself out and achieve growth or contraction. The first phase of the policy the money is not neutral because the money supply is being effected and the real outputs are going to be effected with slight changes. There is a change from money being neutral to not being neutral is because in order for neutrality the real outputs cannot be effected. From what I stated earlier these changes will go back to normal and stabilize over time, which will make the money become neutral again before the change in money supply.

The monetary policy is the most useful and effective when there is neutrality also because the economy doesn't require constant changes in policies to stimulate the economy. It allows the economy to be able to work out the kinks itself. Without neutrality in the long term when applying the monetary policy the economy would not be able to work it self out and become a stimulated economy.