Economics · Macroeconomics
Consider the structural money demand equation M = kPY. Suppose the actual money supply is fixed at M* which is initially unequal to M. According to the classical neutrality principle of money, which variable must adjust to restore long-run macroeconomic equilibrium?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The aggregate Price Level (P)✓
- 2The exogenous money supply itself (M*)
- 3The fraction of income held as money (k)
- 4Real Income / Output (Y)
Correct answer
The aggregate Price Level (P)
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