Question

Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run.
(a) For example, an increase in the money supply, a __________ variable, will cause the price level, a ____________ variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a _______________ variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as _____________.

Answer 1

Answer:

(a) For example, an increase in the money supply, a nominal economic variable, will cause the price level, a nominal economic variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a real economic variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as Neutrality  of money.

Explanation:

Neutrality of money is the theory believed by most economists, which describes money as a neutral factor, such that an increase in the money supply in the economy will simply increase the price level but would have no effect on the output in the economy.

For example, if the Central bank prints more money and supply's it to the economy, this would only affect the price level, which is a nominal value, but would not affect factors that determine the structure of the economy, which are the real economic variables. An example of the real economic variable would be the unemployment level in the economy.