Monetarist theory differs from classical in- A- supposing the neutrality of mone

Question

Monetarist theory differs from classical in- A- supposing the neutrality of money in the short run B-supposing the neutrality of money in the long run C- supposing full employment in the long run D-none of the above Monetarist theory differs from classical in- A- supposing the neutrality of money in the short run B-supposing the neutrality of money in the long run C- supposing full employment in the long run D-none of the above A- supposing the neutrality of money in the short run B-supposing the neutrality of money in the long run C- supposing full employment in the long run D-none of the above

Explanation / Answer

Option B.

Supporting the neutrality of money in the long run.

In monetarist models, monetary policy is said to be neutral in Long run but not in short run.

In short run the rate of interest will be below the natural rate of interest and create an inflationary gap where the aggregate demand for output as a whole will exceed the maximum amount of out put that the Economy is producing.

This causes increase in the level of prices.

Therefore monetary policy maintains neutrality in the long run by keeping the interest rates and the prices at a lower level.

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