Neutrality of Money
What it is:
The neutrality of money is a theory stating that changes productivity.supply only affect prices and wages rather than overall economic
How it works/Example:
For example, when the Federal
There are only two things to do with money: save it or spend it. Accordingly, some of the "new" in the (from the Treasury repurchase) land in bank accounts, and some of the new money land in the hands of retailers, service providers, new employees, etc. This increase in the demand for goods and services drive the prices of those goods and services up. The increased demand may also encourage employers to hire more employees, and the demand for more employees also drives wages up.
However, the neutrality of money theory says that the ripple effect essentially stops there. In other words, the repurchase would not increase the of the 's employees and may not increase the country's .
Why it matters:
The theory of the neutrality of money argues thatis a "neutral" that has no real effect on economic equilibrium. Monetary supply may be able to change how much things cost, says the theory, but it can't change the fundamental nature of the itself. The theory is a component of classical , but it has less relevance and more controversy today. In particular, some argue that the theory really only "works" over the long , if at all.