The argument that "money is neutral in the long run" means that an increase in the money supply can:
A) increase real GDP only temporarily.
B) decrease real GDP only temporarily.
C) increase real GDP permanently.
D) decrease real GDP permanently.

Question

Quizplus · Accepted Answer

The argument that "money is neutral in the long run" states that an increase in the money supply does not have a permanent impact on real variables such as GDP. Instead, it only leads to a temporary increase in output and prices, which eventually returns to its original level in the long run. This concept is known as the quantity theory of money, and it suggests that changes in the money supply only affect nominal variables like prices and inflation, not real variables like output and employment. Therefore, an increase in the money supply can increase real GDP only temporarily, but not permanently.

The Argument That "Money Is Neutral in the Long Run