QuestionJune 4, 2025

Money will not be neutral in the short run in the AD-AS model when prices and wages are sticky. True False

Money will not be neutral in the short run in the AD-AS model when prices and wages are sticky. True False
Money will not be neutral in the short run in the AD-AS model when prices and wages are sticky.
True
False

Solution
4.6(178 votes)

Answer

True Explanation 1. Define Money Neutrality Money neutrality implies that changes in the money supply only affect nominal variables and not real variables like output or employment. 2. Analyze Short Run with Sticky Prices/Wages In the short run, if prices and wages are sticky, changes in the money supply can affect real output and employment because prices do not adjust immediately to changes in demand. 3. Conclusion on Money Neutrality Since real variables are affected in the short run due to price/wage stickiness, money is not neutral.

Explanation

1. Define Money Neutrality<br /> Money neutrality implies that changes in the money supply only affect nominal variables and not real variables like output or employment.<br />2. Analyze Short Run with Sticky Prices/Wages<br /> In the short run, if prices and wages are sticky, changes in the money supply can affect real output and employment because prices do not adjust immediately to changes in demand.<br />3. Conclusion on Money Neutrality<br /> Since real variables are affected in the short run due to price/wage stickiness, money is not neutral.
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