The neutrality of money is one idea the any readjust in the money supply makes no distinction to real economic variables.

You are watching: What does the term money neutrality" mean?"

Real attention rates, employment, genuine consumption, or GDP (gross domestic product), because that example, room real economic variables.

Only nominal variables within the economy, such as wages, prices, and also exchange rates transform when the money supply changes.

We likewise use the terms monetary neutrality or neutral money.

If a country’s central bank doubles the money supply, price will rise by the same amount. In various other words, if you double the money supply, each money unit is worth 50% less.

One cancels out the other

Everything cancels each other out. They all rise equally. Therefore, over there is no real economic change.

Price level might readjust as a result of enhancing the money supply, yet not output or the simple structure of the country’s economy.

Neutrality that money – classical economics

The neutrality that money theory is a core belief of timeless economics. The was very first proposed by David Hume (1711-1776), a Scottish historian, economist, philosopher and also essayist, best known this day for his very influential mechanism of radical empiricism, naturalism and also skepticism.

Hume set out the timeless dichotomy the there are two types of economic variables – nominal and real. He explained that whatever influences in the name of variables may not necessarily have actually an impact on the actual variables, i.e. The real economy.

Nominal and also real variables

Examples of nominal variables in the economic climate are exchange rates, wages and also prices. Instances of actual variables space output (GDP), the amount of actual investment, and employment.

While Hume thought up the ide of monetary neutrality, the hatchet ‘The Neutrality that Money’ was very first used by continental financial experts at the beginning of the twenty century.

Friedrich Hayek

When Friedrich Hayek (1899-1992), an Austrian-British economist and also philosopher, finest known because that his defense of classic liberalism, introduced the term in 1931, it exploded as a distinct topic in economic literature, especially those composed in the English language.

According come the classic dichotomy, various forces have actually an effect on real and nominal variables.

Monetarism and also the neutrality that money

Current economic experts who assistance monetarism think that pure monetary neutrality does no exist in the real world, specifically in the brief term.

In the short run, altering the money supply may affect real variables, such together employment.

However, in the lengthy run, after ~ the money circulates transparent the economy, the neutrality of money develops itself once again. In various other words, the real economic climate does no change, say monetarist economists.

Superneutrality that Money

The Superneutrality that Money, an even stronger property than neutrality that money, holds that not only do alters in the money it is provided not impact the real economic situation at all, but likewise that the rate of money supply development has absolutely no impact on genuine variables.

In this case, in the name of prices and wages continue to be proportional to the in the name of money supply not only in an answer to one-off permanent transforms in the in the name of money supply, but additionally in response to permanent changes in the rate at i m sorry the nominal money supply grows.

‘Helicopter Drop’ story

Milton Friedman (1912-2006), one American economist that was forgive the 1976 Nobel for Economics, offered the example of the ‘helicopter drop’ to describe the neutrality the money.

Imagine a ar in perfect financial equilibrium, once suddenly the following occurs:

“Let us suppose, then, that at some point a helicopter paris over our theoretical long-stationary community and drops added money indigenous the sky equal come the amount already in circulation-say, $2,000 every representative individual who earns $20,000 a year in income.”

”The money will, the course, it is in hastily gathered by members of the community. Let united state suppose further that anyone is persuaded this event is unique and will never be repeated….”

“…People’s attempts to spend an ext than they obtain will be frustrated, yet in the procedure these attempts will certainly bid increase the nominal worth of goods and services. The extr pieces of file do not alter the straightforward conditions that the community. They do no added productive volume available.”

”They transform no tastes….the final equilibrium will be a nominal earnings of $40,000 per representative individual instead of $20,000, with exactly the same flow of genuine goods and also services together before.”

Economic equilibrium is an economic state in which need equals supply.

Helicopter drop

We use the term helicopter drop once referring come the printing of large sums of money. The authorities distribution the money come people, hoping the the measure will an increase the economy. We also call that helicopter money.

See more: Samhain Trick R Treat Costume S, Sam Trick R Treat

It is mainly a an allegory for unusual steps to kick-start the economy. Central banks and also governments may adopt such measures throughout recessions and deflationary periods.

In the 21st century, the term obtained popularity again as soon as Ben Bernanke described it in a 2002 speech. He had actually just end up being a brand-new Fed governor. In fact, some civilization started calling him ‘Helicopter Ben.’