ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -the concept that money only impacts nominal variables, not real variables, in the long run; in other words, increasing the money supply might decrease the nominal interest rate, but it won’t have an impact on the real interest rate.

Detailed explanation-2: -Changes in the money supply affect nominal variables but not real variables. Real output is determined by productivity and factor supplies, and not by the quantity of money. However, the value of nominal variables is determined by and is proportional to the quantity of money.

Detailed explanation-3: -In classical monetary theory, the change in money supply will affect the nominal variables, but will not affect the real variables because according to classical dichotomy, the power affecting real and nominal variables is different.

Detailed explanation-4: -The neutrality of money, also called neutral money, is an economic theory stating that changes in the money supply only affect nominal variables and not real variables.

Detailed explanation-5: -Lowering the federal funds rate will increase the money supply. A lesser rate will entice banks and other borrowers to request more cash. In turn, the federal reserve will print more cash. Therefore, reducing the federal rate will predominately have a major effect on increasing the overall money supply.