Final answer:
The statement claiming the neutrality of money in both the short run and long run when prices and wages are completely flexible is false. While money tends to be neutral in the long run as the economy adjusts, in the short run, sticky wages and prices prevent immediate adjustments to changes in the money supply.
Step-by-step explanation:
The statement that money is neutral in both the short run and long run in the AD-AS model when prices and wages are completely flexible is false.
In the short run, money is generally not neutral because prices and wages are sticky, meaning they do not adjust instantly to changes in the money supply or economic conditions. This stickiness causes changes in aggregate demand to influence output and employment levels.
Over the long run, however, the neoclassical perspective argues that money becomes neutral as wages and prices fully adjust, leading the economy back to its potential GDP and natural rate of unemployment.
Yet it is worth noting that the speed of this adjustment varies among different economic theories, such as the rational expectations and adaptive expectations models.
In the context of the AD-AS model, flexible prices play a crucial role in determining how the economy returns to its potential GDP in the long run.
If aggregate demand increases or decreases, the flexible prices over time help the economy adjust back to its long-run equilibrium.
Economists modeling the blend of short-term Keynesian and long-term neoclassical theories find that creating a comprehensive model involving sticky wages and prices in the short run and adjustments in the long run isn't straightforward due to the complex interplay of these variables.