Is Money Neutral Contrast the view regarding the neutrality of money Essay

Is Money Neutral Contrast the view regarding the neutrality of coin amidst Real Business Cycle theory and New Keynesian Theor - Essay ExampleThis is an important dubiety to ask, as it affects the way, the government chooses to govern the economy and the ways to control it. The two schools of thought, the New Keynesian opening and the Real Business Cycle Theory, debate the answer to this question (Mankiw, pp. 181-220, 2003). Both of these theories know a uncommon perspective to offer on the answer, and since each raises valid arguments, neither has yet been discredited for the other. The theory of cash neutrality maintains that the exertion of funds does not affect square, inflation-adjusted factors like employment original Gross house servant Product (GDP) and real consumption (real because they have are all adjusted for inflation). This is because this theory considers the force of money as an inflationary one, with no large implications for the economy in terms of the l argeeconomic factors. However, the theory does acknowledge the impact money has on token(a) variables, such as equipment casualty and wages, and even exchange step of the countrys currency (Wickens, pp. 199, 2009). These factors bound to gain influence from the money rate of interest, as they have a direct link to money and its circulation in the economy. The two schools of thought that debates on the neutrality of money have opposite views about how far-reaching the effect of money can be in an economy. The classical toughie states that money is neutral in both the short run as well as the ample run. This means that this model considers money to be a neutral force, one that does not affect macro factors such as GDP or employment in the economy. Whereas, the Keynesian school of thought states that a force as strong as money does have its impact on the economy in the end. It believes that monetary form _or_ system of government does have a strong impact on the real economy, if one waits large time before observing the changes. Each of these schools believes that this effect is visible within the short run for a short period of time, which is a factor on which they both see eye to eye, but for unalike reasons. For the long term however, they both offer opposing views (Wickens, pp. 199, 2009). The classical model presents the view that monetary policy cannot affect the real economy and its macro factors, neither in the short run, nor in the long-run (Gali, pp 50-79, 2008). It states that nominal shocks, which are changes in the money supply and money demand, do not have any effect on the business cycle. This monetary policy is one of the tools that a government uses to control the economy, which it does by manipulating the money supply and circulation. According to the theory, when money supply changes, it affects price proportionately. However, there is no effect on the real variables in the economy, such as the real interest rate or the unemployment le vel in the economy. As mentioned above, the classical school does also believe that the money supply affects the real factors for a short period. However, it believes that actually soon, the price level adjusts to this change in money supply, thus making it ineffective to any real factors in the economy. This is apparent in the diagram below, which shows how the equilibrium reverts to normal after a temporary price shock (Abel and Bernanke, pp. 2005). In other words, it believes that the non-neutrality of money is short-lived, persisting over a period of insignificant length. Thus,