In the context of positive and normative analysis, what does the term 'money neutrality' mean?

• A. Changes in the money supply do not affect real economic variables such as output or employment in the long run.
• B. An increase in the money supply always leads to higher real GDP.
• C. Changes in the money supply have immediate and permanent effects on real wages.
• D. Money neutrality refers to the government's ability to control inflation through fiscal policy.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the distinction between positive and normative analysis. Positive analysis deals with objective, testable statements about how the economy works, while normative analysis involves subjective opinions about what ought to be.
2. Step 2: Define 'money neutrality' in economic terms. Money neutrality is a concept in macroeconomics which states that changes in the money supply only affect nominal variables (like prices and wages) but do not affect real variables (such as output, employment, or real GDP) in the long run.
3. Step 3: Recognize that money neutrality implies that increasing the money supply will not change real economic outcomes like real GDP or employment levels once the economy has adjusted.
4. Step 4: Differentiate money neutrality from other statements: it does not mean that money supply changes always increase real GDP, nor that money supply changes have immediate and permanent effects on real wages, nor that it relates to fiscal policy controlling inflation.
5. Step 5: Summarize that the correct interpretation of money neutrality is that changes in the money supply do not affect real economic variables such as output or employment in the long run.