Question

Most economists believe that in the long run, changes in the money supply Group of answer choices affect nominal but not real variables. This view that money is ultimately neutral is consistent with classical theory. affect real but not nominal variables. This view that money is ultimately neutral is inconsistent with classical theory. affect nominal but not real variables. This view that money is ultimately neutral is inconsistent with classical theory. affect real but not nominal variables. This view that money is ultimately neutral is consistent with classical theory.

Answer 1

affect nominal but not real variables. This view that money is ultimately neutral is consistent with classical theory.

Step-by-step explanation:

This idea is held by classical economists (not by most economists) since they believe in the quantitative theory of money:

MV = PQ

• M = quantity of money
• V = velocity of money
• P = price level
• Q = quantity of goods

Classical theory was abandoned 90 years ago (according to classical theory, recessions were not possible and couldn't exist, but then the Great Depression came and the impossible became true). Neo-classical or monetarists appeared in the 1960s, and lately, neo-neo-classical appeared with George W. Bush. The problem with the quantitative theory is that it needs the following things to be true in order to hold, and empirical evidence over the last 90 years showed that none of them are true:

1. the velocity of money has to be constant (AND IT IS NOT CONSTANT)
2. real output is independent on money supply (NOT TRUE)
3. causation goes from money to prices (MODERN ECONOMISTS BELIEVE IT IS THE OTHER WAY)