Since potential GDP defines aggregate supply in the long run, it makes sense that
A) only monetary policy is neutral in the long run, because fiscal policy can influence the determinants of potential GDP in the short run.
B) only fiscal policy is neutral in the long run, because monetary policy can influence the determinants of potential GDP in the short run.
C) both monetary policy and fiscal policy are neutral in the long run, because neither can influence the determinants of potential GDP in the short run.
D) both monetary policy and fiscal policy are effective in the long run, because both can influence the determinants of potential GDP in the short run.
E) none of the above.

Question

Quizplus · Accepted Answer

Both monetary and fiscal policies are considered neutral in the long run because, according to classical economic theory, these policies cannot influence the fundamental determinants of potential GDP, such as technology, labor, and capital, in the long run.

Since Potential GDP Defines Aggregate Supply in the Long Run