Question

Money is neutral in:___________

A. the short run, since it cannot alter the real aggregate output or price level in the short run.
B. both the short and long run, since it cannot alter price levels or aggregate output in the long and short run.
C. the long run, since it only affects the price level, but not aggregate output or interest rates.
D. the short run, since it cannot alter the price levels or interest rate in the short run.

Answer 1

C

Step-by-step explanation:

Money neutrality is a theory which submits that money supply only affect nominal variable and not real variables.

Nominal variables include price, wages and exchange rate

real variables include employment and real GDP

Money is only neutral in the long run and not in the short run because of money illusion. Money illusion causes economic agents to respond to money supply changes.

Money is neutral only in the long run