Standard monetary theory says that changes in the money supply and prices are neutral under certain circumstances, such as in the very long run, and also after monetary reforms where all contracts are automatically adjusted to the change in the money supply. In the short run, monetary inflation may have real effects, partly due to the fact that nominal hourly wages are sticky. If workers have money illusion they may confuse nominal and real wage changes.
How about grade inflation? Does that show a similar pattern? Here is C.W. at Free Exchange:
Some colleges have pursued anti-inflation policies of which Paul Volcker would be proud. In 2004 administrators at Wellesley College, a prestigious, women's-only university, mandated that in introductory and intermediate courses (with at least ten students) the average grade could not exceed a B-plus, equal to a grade-point average of 3.33. Three economists look at the impact.
Only courses in high-grading departments in the humanities and social sciences needed to change grading practices: science subjects were unaffected by the policy. That gave the economists a good "control", allowing for a meaningful analysis of the policy.
What happened? Previously generous departments became more tightfisted. Students were 14% points less likely to get an A in the treated departments (though they were no more likely to get a C-minus or below). Lots more Bs were given.
OK, so Wellesley adopted a contractionary, or "tight grade policy." And grade deflation set in for some departments. Before considering the results, let's consider what might have happened. One possibility is that the policy had no real effects. People saw through the lower grades and realized that Wellesley students were doing just as well, it's just that standards had tightened up. Students in the 85th percentile would be perceived as doing just as well, despite lower nominal grades. In fact, that's what I would have expected to happen. But I was wrong:
More interestingly, the cap changed students' course choices. For courses in the treated departments, enrollment fell by about 19%. Students were 30% less likely to major in one of these courses.
So Wellesley's tight grade policy created a depression in the humanities industries departments, just as a "grade illusion" proponent might expect.
I suppose there will be some crazy Austrian readers who complain that I've got it all wrong. It's not the depression that's the problem, it's the preceding humanities boom. The grade deflation is merely wringing the excesses out of the economy academy. The Economist continues:
These results are positive and other universities can learn from them. Before the policy the difference between the profligate and the parsimonious departments could exceed 0.6 grade points. The hope of higher grades could have encouraged some students, who would really have preferred to study sciences, to move to humanities. But by grading more uniformly, Wellesley removed this perverse incentive. Universities should take note and encourage their students to study what they find intrinsically rewarding; not what will give them bloated grades.
OK, so the Austrians are right in this case. But I still think they are wrong about 2006-09.
PS. And I still think if grade inflation were tackled on a nationwide basis the effects would be neutral. But who really knows?