Monetary policy is neutral in the long run even in an open economy in part because
A) price adjustments eventually return the nominal and real exchange rates to their original levels.
B) price adjustments eventually return the real exchange rate to its original level by depreciating the nominal rate by the rate of inflation.
C) potential GDP is always achieved in the long run even if the real and nominal exchange rates are altered.
D) all the stimulus eventually leaks out into the rest of the world.
E) none of the above.

Question

Quizplus · Accepted Answer

Monetary policy is considered neutral in the long run because price adjustments eventually offset the initial effects of monetary policy changes. This means that the real exchange rate returns to its original level, adjusting for inflation through changes in the nominal exchange rate. This process aligns with the concept that in the long run, money is neutral, affecting only nominal variables without real impacts on the economy's output or real exchange rates.

Monetary Policy Is Neutral in the Long Run Even in an Open