Question

The neutrality of money a. In what sense is money neutral? Why is monetary policy useful if money is neutral? b. Fiscal policy, just like monetary policy, cannot change the natural level of output. Why, then, is monetary policy considered neutral but fiscal policy isn't? c. Discuss the statement: 'Since neither fiscal nor monetary policy can affect the natural level of output, it follows that, in the medium run, the natural level of output is independent of all government policies.'

     The neutrality of money
a. In what sense is money neutral? Why is monetary policy useful if money is neutral?
b. Fiscal policy, just like monetary policy, cannot change the natural level of output. Why, then, is monetary policy considered neutral but fiscal policy isn't?
c. Discuss the statement: 'Since neither fiscal nor monetary policy can affect the natural level of output, it follows that, in the medium run, the natural level of output is independent of all government policies.'

Macroeconomics Australasian Edition

Olivier Blanchard,… 4th Edition

Chapter 7, Problem 4

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This implies that while money can influence inflation and interest rates, it does not impact the real economic output or the natural level of employment. Show more…

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The neutrality of money a. In what sense is money neutral? Why is monetary policy useful if money is neutral? b. Fiscal policy, just like monetary policy, cannot change the natural level of output. Why, then, is monetary policy considered neutral but fiscal policy isn't? c. Discuss the statement: 'Since neither fiscal nor monetary policy can affect the natural level of output, it follows that, in the medium run, the natural level of output is independent of all government policies.'

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