In: Economics
In words explain Classical Dichotomy, Money Neutrality, and the Classical theory (short and long run).
Answer - .
Introduction :
Together , Neutrality of money is a short run concept to the long run Classical Dichotomy , which says that money circulation effects just the prices and not the level of real output in the economy
Classical Dichotomy or Classical Theory of money:
It is believed to be happen when real variable i.e. output and real rate of interest are being studied without analysing the money value of output and interest which means MONEY IS CONSIDERED NEUTRAL .
It further takes pre Keynes approach to believe that money is veil in LONG RUN -
Neutrality of money :
It was given by Friedrich A.Hayek in 1931.Neutrali money theory is related to classical dichotomy ,wherein it believes that central bank does not affect the economy in real terms by creating money
Conclusion :
Both talk about different possibilities that come with the change in money supply however and have different outcomes; for the former it is of long run and for latter it is for short run
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