Superneutrality of Money

And finance Allah Shmoop What are the neutrality and super

neutrality of money All right people your money just doesn't

care You let your money pick whatever it wants to

have for breakfast Hey cash stack Waffles or pancakes Yeah

it doesn't care Timeto unwind in front of the TV

Well you ask your money Do you wanna watch game

of thrones or Black mirror Your money shrugs It just

doesn't care That's the neutrality of money But there's another

kind of neutrality of money as well Here in an

economic sense the term neutrality of money means that changes

in the money supply You know the amount of money

in the system sloshing around out there doesn't impact the

rial variables in the economy Stuff like underlying supply and

demand or the unemployment rate or the amount of output

in the economy Those things don't get fundamentally changed by

the amount of cash floating around Well the amount of

money can affect what's called nominal variables Things like prices

and wages But it doesn't impact the rial variables So

it isn't that your money doesn't care about you It's

that the economy doesn't care about money Wait isn't money

what the economy is all about We goto work to

get money right That's the reason we work We spend

money on everything we need to buy money Is the

purpose of the economy right Well no not really The

economy is about Resource is in labor You take stuff

like a tree or some iron or from the ground

You add a little human ingenuity and the elbow grease

and boom You get a house you know or a

car or a flying pizza delivery drone or something like

that Well money is just a way to move things

along efficiently It makes it so that we don't have

to barter for everything Like say there's not much money

in the economy not a lot of cash Prices are

low You can buy a brand new taffy pulling machine

for one hundred bucks Okay now let's dump a whole

bunch of extra money into the system Now there's ten

times as much cash as there was before That's going

to cause a lot of disruption right Massive inflation It'll

take some time to adjust but once the economy gets

used to all that additional cash well everything evens out

the price you pay for your taffy puller is now

much higher Numerically it costs a thousand dollars instead of

one hundred dollars But the basic factors of the economy

stay the same People want the same amount of taffy

as they did before Demand is the same You can

still get the taffy puller you wanted Supply stays the

same on ly prices changed with the money that was

added to the system there So that's the neutrality of

money Nominal prices and nominal wages are influenced by the

amount of money in the system but the underlying conditions

remain the same Well that's the theory anyway However not

everyone agrees with this theory Working in practice One example

While the United States government is a neutrality of money

skeptic how do we know Well because if the theory

is true then the Fed or Federal Reserve can't do

anything to manage the economy Nothing It does boost long

term economic growth and it can't do anything to increase

employment There is also a class of economists who hold

a middle position They argue that changes in the amount

of money can have a short term In fact a

surge of cash will prompt spending in the short term

Give people a bunch of fat stacks of cash and

well they'll spend him You know instant demand boost But

the's economists don't think the effect last too long Eventually

people get used to the new amounts of cash Prices

go up The extra money they have doesn't come with

any additional buying power and it kind of settles into

a groove there Right things eventually settle into the same

underlying patterns as they were in before But during the

transition period there can be a measurable albeit fleeting impact

So what is super neutrality than money that really doesn't

care Well the theory of super neutrality says that not

only does the level of money not matter but the

rate of supply change doesn't matter either That is add

money faster added slow It doesn't impact things like output

or unemployment And as for your money's preference for breakfast

foods or TV shows while you may never get an

answer just don't ask whether it prefers D C or

marvel Your money may never shut up Been there done

that