According to classical macroeconomic theory, money supply shocks are “neutral.”

a. Explain what this means.

b. Based on that theory, how would a 5% increase in a nation’s money supply affect its real ?wage rate (W/P), all else equal (up, down, or no change, and by how much)? ?

c. According to the quantity theory of money, how would a 5% increase in the money supply ?affect the price of goods and services (P), all else equal (up, down, or no change, and by ?how much)? ?

d. To be consistent with both theories, what would have to happen to the nominal wage rate ?(W)? Explain. ?

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a Money Supply Shocks are neutral means that any change in the quantit... View the full answer