Question

What is meant by the term "neutrality of money"?

• A. Management of money and credit to control inflation.
• B. Promotion of price stability and exchange stability.
• C. Doing away the disturbing effects of changes in the quantity of money on the important economic variables like income, output and employment.
• D. Acceleration of growth rate in the economy.

Answer 1

The correct option is C Doing away the disturbing effects of changes in the quantity of money on the important economic variables like income, output and employment.

The term 'neutrality money' was coined by Friedrich Hayek and was originally defined as a market coordinating money rate of interest, which did not create a boom and bust cycle by falsely misdirecting investment through the time structure of production goods.
It is now used under the Keynesian economics expression, where, money is assumed to affect only nominal variables in the economy and leave real economic variables like real income, employment, etc. unaffected.