The Supply and Demand for Money

Interest rates effectively adjust to bring the market into equilibrium (“clear the market”).

Money neutrality: an increase in the money supply is thought in the long run simply to lead to an increase in the price level while leaving real variables like output and employment unaffected.

In practice, it is very difficult for economists to be sure that money neutrality holds in the long run.

We assume that monetary authorities do believe that the money supply can affect realthings in the short run.