I have some questions on the concepts of the classical dichotomy and money neutrality:

  1. What is the difference, if any, between the concepts of classical dichotomy and money neutrality? As I understand it, the classical dichotomy is the assumption that changes in nominal variables do not affect real variables. But my textbooks and lectures do not seem to distinguish between this concept, and that of money neutrality.

  2. If the classical dichotomy suggests that changes in nominal variables do not affect real variables, does it have anything to say in the reverse direction? Do changes in real variables affect nominal variables, in a world/model in which the classical dichotomy holds?

  3. I know that the classical dichotomy does not hold in the short run. But what evidence is there that the classical dichotomy may or may not hold in the long run? Is there a well-known academic piece on this issue, or a consensus in the literature?


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