Question

Why money is not neutral according to keynesian theory?

Answer 1

Neutrality of money is the idea that a change in the stock of money affects only nominalvariables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption.Neutrality of money is an important idea in classical economics and is related to the classical dichotomy. It implies that the central bank does not affect the real economy (e.g., the number of jobs, the size of real GDP, the amount of real investment) by creating money. Instead, any increase in the supply of money would be offset by a proportional rise in prices and wages. This assumption underlies some mainstream macroeconomic models (e.g., real business cycle models). Others like monetarism view money as being neutral only in the long-run.

When neutrality of money coincides with zero population growth, the economy is said to rest in steady-state equilibrium