Discussion
Classical economists argued that money is neutral because ............. .
Answer: D
Classical economists held money neutral because prices adjust quickly to a monetary expansion.
In the classical model, prices and wages are fully flexible. An increase in the money supply raises the price level in proportion, leaving real variables such as output, employment and the real interest rate unchanged. Money affects only nominal values, which is what neutrality means.
Slow-adjusting or fixed prices in the short run (B, C) are Keynesian assumptions and are the reason money can affect output. Adjustment only in the long run (A) describes the modern view that money is neutral in the long run but not in the short run.
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