The principle of monetary neutrality implies that an increase in the money supply will increase

Question

a. neither the price level nor real GDP.
b. the price level, but not real GDP.
c. real GDP, but not the price level.
d. real GDP and the price level.

Answer 1

The principle of monetary neutrality implies that changes in the money supply do not affect real variables in the long run, including real GDP. Instead, increases in the money supply only lead to changes in the price level. Therefore, the correct answer is:

b. the price level, but not real GDP.