Money Neutrality

Ardyn Granger

April 7, 2014

Blog Post #1

              Money neutrality is a situation in which employment, output and economic indicators are not impacted by changes in money supply. In simpler terms, neutrality of money is where changing the money supply will not change the supply and demand of goods.

               Real and Nominal Variables are both effected by money neutrality. Real variables include GDP, interest rate and wage and are measured in physical units of output, whereas nominal variables also include GDP, wage and interest rate but are measured in dollars. Money is said to be neutral because of the classical dichotomy, which is the “theoretical separation of real and nominal values”(Mankiw 2012). Because money neutrality does not effect as much in the long run and it is much more reasonable, money is said to be neutral in the long run as opposed to the short run. It tends to have a bigger impact in the short run with the changing of nominal variables and prices.

              The monetary policy in the United States is controlled by the Federal Reserve, in an attempt to control our economy. Controlling our money supply is critical not only for our economy, but for our nation as a whole as we try to control inflation and economic growth. Our monetary policy is controlled by means of changing the bank reserves as well as adjusting the interest rate. This being said, our economy would not be continuing to grow without the equilibrium that is money neutrality.

Mankiw, N. G. (2012). Macroeconomics (8th ed.). New York: Worth.

Neutrality Of Money. (n.d.). Investopedia. Retrieved April 7, 2014, from http://www.investopedia.com/terms/n/neutrality_of_money.asp