Question

Questions:

1. Economists believe in the “Long-run neutrality of money”; what does that mean? If monetary policies help in the short run but do not help in the long run, should we not bother with those policies? What does this tell you about the current monetary policies of the Fed?

Answer 1

Long term neutrality of money which is believed by the economist means that with any changes in supply of money in the economy would only impact the goods and services due to supply and demand effect but not the overall price level and productivity of the economy. This only affects the nominal variables and not the real variables. In simple words, money becomes neutral.

The monetary policies affects the variables in the short run but fades away in the long run. This policies are necessary for both the long run as well as the short run for controlling the supply of money and maintaining price stability which is essential for the growth of the economy. Monetary policies helps to cut down the interest rate to increase the money supply in the economy. We shouldn't be bothered with such policies because with the objectives of the short run, the policies of the long run are also get developed which helps to stabilize the price, employment and output.

The current monetary policy of Fed is to maintain a stable price level by reducing the interest rate and increasing the investment spending so that the money supply is in large quantity for the growth of the economy. Fed conduct its monetary target and meet the target through open market operations.