Theory of Monetary Neutrality

Definition

The theory of monetary neutrality states that changes in the money supply do not have a long-term impact on real variables such as output, employment, and economic growth. It suggests that in the long run, changes in the money supply only affect nominal variables like prices.

Related terms

Quantity Theory of Money: The quantity theory of money states that there is a direct relationship between changes in the money supply and changes in prices. It suggests that when there is an increase in the amount of money circulating in an economy without a corresponding increase in production, inflation occurs.

Money demand: Refers to how much money individuals and businesses want to hold for transactions or speculative purposes.

Inflation: The general increase in prices over time due to an excess growth in the money supply relative to goods and services available.