In economics, neutrality of money is the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages and exchange rates, having no effect on real variables like GDP, employment, and consumption.
Paul Krugman:
The proposition known as the neutrality of money - the assertion that other things equal the price level is proportional to the money supply - is central to every monetary theory I know of.
Ludwig Von Mises (The Non-Neutrality of Money, 1934):
.... the essence of the fallacy of money's neutrality [is] that .... changes in purchasing power [are] brought about simultaneously in the whole market and that they [affect] all commodities to the same extent ....
To simplify and to shorten our analysis let us look at the case of inflation only. The additional quantity of money does not find its way at first into the pockets of all individuals; not every individual of those benefited first gets the same amount and not every individual reacts to the same additional quantity in the same way .... The result is that there is in the economic system a new dispersion of wealth and income and in this new social order the wants of individuals are satisfied to different relative degrees, than formerly. Prices in this new order can not simply be a multiple of the previous prices.
.... I wish to emphasize that in a living and changing world, in a world of action, there is no room left for a neutral money. Money is non-neutral or it does not exist.
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