Discuss the concepts of dichotomy and neutrality of money in the classical, neo-classical andKeynesian economics.

In classical economics, the concept of dichotomy refers to the separation of the real and monetary sectors of the economy. According to classical economists such as Adam Smith and David Ricardo, changes in the money supply only affect nominal variables, such as prices and wages, while real variables, such as output and employment, are determined by factors such as technology and resource availability. This implies that changes in the money supply do not have a long-term impact on the real economy.

The concept of neutrality of money in classical economics is closely related to dichotomy. It suggests that changes in the money supply only affect nominal variables and do not have any real effects on the economy. In other words, an increase in the money supply will lead to proportional increases in prices and wages, without affecting the overall level of output or employment.

In neo-classical economics, the concepts of dichotomy and neutrality of money are also present. Neo-classical economists, such as Alfred Marshall and Leon Walras, build upon the classical framework and emphasize the role of market forces in determining prices and allocations of resources. They argue that changes in the money supply will only have temporary effects on the economy, as prices and wages adjust to restore equilibrium in the markets. This implies that in the long run, changes in the money supply will not have any real effects on the economy.

However, in Keynesian economics, the concepts of dichotomy and neutrality of money are challenged. John Maynard Keynes argued that changes in the money supply can have real effects on the economy, particularly in the short run. According to Keynes, changes in the money supply can influence aggregate demand, which in turn affects output and employment. He emphasized the role of monetary policy in stabilizing the economy and advocated for active government intervention to manage aggregate demand.

In summary, the concepts of dichotomy and neutrality of money differ across classical, neo-classical, and Keynesian economics. Classical and neo-classical economists argue that changes in the money supply only affect nominal variables and do not have long-term real effects on the economy. On the other hand, Keynesian economists argue that changes in the money supply can have real effects on the economy, particularly in the short run.