If money is neutral,

Question

a. a change in the money supply reduces velocity proportionately; therefore, there is no effect on either prices or real output.
b. a change in the money supply only affects nominal variables such as prices and dollar wages.
c. an increase in the money supply does nothing.
d. a change in the money supply only affects real variables such as real output.
e. the money supply cannot be changed because it is tied to a commodity such as gold.

Answer 1

If money is neutral, the most appropriate choice would be:

b. a change in the money supply only affects nominal variables such as prices and dollar wages.

In economic theory, the neutrality of money suggests that changes in the money supply do not affect real variables (like output or employment) in the long run, but they do influence nominal variables (like prices and wages). Changes in the money supply can lead to proportional changes in price levels, but not in real output.