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Econ: What are the Neutrality and Superneutrality of Money? 18 Views


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What are the Neutrality and Superneutrality of Money? Codified as a term by economist Friedrich Hayek (author of, The Road to Serfdom), the Neutrality of Money is a theory that posits that money supply can change pricing but not economic structure or aggregate output. The Superneutrality of Money further posits that money supply has no bearing on economic output and any other real variables apart from real money balances.

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Transcript

00:00

And finance Allah Shmoop What are the neutrality and super

00:06

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

00:11

care You let your money pick whatever it wants to

00:13

have for breakfast Hey cash stack Waffles or pancakes Yeah

00:18

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

00:22

Well you ask your money Do you wanna watch game

00:25

of thrones or Black mirror Your money shrugs It just

00:29

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

00:32

kind of neutrality of money as well Here in an

00:36

economic sense the term neutrality of money means that changes

00:39

in the money supply You know the amount of money

00:41

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

00:44

rial variables in the economy Stuff like underlying supply and

00:48

demand or the unemployment rate or the amount of output

00:51

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

00:55

the amount of cash floating around Well the amount of

00:58

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

01:02

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

01:07

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

01:10

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

01:14

what the economy is all about We goto work to

01:16

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

01:19

money on everything we need to buy money Is the

01:22

purpose of the economy right Well no not really The

01:26

economy is about Resource is in labor You take stuff

01:29

like a tree or some iron or from the ground

01:32

You add a little human ingenuity and the elbow grease

01:35

and boom You get a house you know or a

01:37

car or a flying pizza delivery drone or something like

01:41

that Well money is just a way to move things

01:43

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

01:46

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

01:49

in the economy not a lot of cash Prices are

01:51

low You can buy a brand new taffy pulling machine

01:54

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

01:57

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

01:59

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

02:02

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

02:05

take some time to adjust but once the economy gets

02:08

used to all that additional cash well everything evens out

02:11

the price you pay for your taffy puller is now

02:14

much higher Numerically it costs a thousand dollars instead of

02:17

one hundred dollars But the basic factors of the economy

02:21

stay the same People want the same amount of taffy

02:24

as they did before Demand is the same You can

02:27

still get the taffy puller you wanted Supply stays the

02:30

same on ly prices changed with the money that was

02:33

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

02:36

money Nominal prices and nominal wages are influenced by the

02:40

amount of money in the system but the underlying conditions

02:43

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

02:46

everyone agrees with this theory Working in practice One example

02:50

While the United States government is a neutrality of money

02:53

skeptic how do we know Well because if the theory

02:56

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

02:59

anything to manage the economy Nothing It does boost long

03:02

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

03:06

employment There is also a class of economists who hold

03:09

a middle position They argue that changes in the amount

03:12

of money can have a short term In fact a

03:15

surge of cash will prompt spending in the short term

03:18

Give people a bunch of fat stacks of cash and

03:20

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

03:23

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

03:26

people get used to the new amounts of cash Prices

03:28

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

03:31

any additional buying power and it kind of settles into

03:33

a groove there Right things eventually settle into the same

03:36

underlying patterns as they were in before But during the

03:39

transition period there can be a measurable albeit fleeting impact

03:44

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

03:48

care Well the theory of super neutrality says that not

03:51

only does the level of money not matter but the

03:54

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

03:58

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

04:02

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

04:05

foods or TV shows while you may never get an

04:07

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

04:09

marvel Your money may never shut up Been there done

04:12

that

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