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Money neutrality

AnalyticsTrade Team
AnalyticsTrade Team Last updated on 26 Apr 2023

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Money Neutrality

Money neutrality is an economic concept that states that changes in the money supply should not affect the real economy. This means that the money supply should remain constant in terms of its purchasing power, regardless of the amount of money in circulation. Money neutrality is a cornerstone of modern macroeconomic theory and is used to explain the effects of monetary policy on the economy.

History of Money Neutrality

The concept of money neutrality was first proposed by the economist Irving Fisher in his 1911 book The Purchasing Power of Money. Fisher argued that changes in the money supply should not affect the real economy, and that the purchasing power of money should remain constant. This idea was later developed by John Maynard Keynes in his 1936 book The General Theory of Employment, Interest and Money. Keynes argued that changes in the money supply could have an effect on the real economy, but that this effect would be temporary and would eventually be offset by changes in the price level.

Since then, the concept of money neutrality has been widely accepted by economists and is used to explain the effects of monetary policy on the economy. For example, when the Federal Reserve increases the money supply, it is assumed that the increase will not have a lasting effect on the real economy, as the increase in the money supply will eventually be offset by an increase in the price level.

Comparison Table

Money Supply Real Economy
Increases No lasting effect
Decreases No lasting effect

Summary

Money neutrality is an economic concept that states that changes in the money supply should not affect the real economy. This means that the money supply should remain constant in terms of its purchasing power, regardless of the amount of money in circulation. Money neutrality is a cornerstone of modern macroeconomic theory and is used to explain the effects of monetary policy on the economy. For more information on money neutrality, you can visit the websites of the Federal Reserve, the International Monetary Fund, and the Bank for International Settlements.

See Also

  • Monetary Policy
  • Inflation
  • Deflation
  • Interest Rates
  • Exchange Rates
  • Fiscal Policy
  • Gross Domestic Product
  • Balance of Payments
  • Money Supply
  • Real Economy

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