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

Question

a.

increase neither the price level nor real GDP.
b.

increase the price level, but not real GDP.
c.

increase real GDP and the price level.
d.

increase real GDP, but not the price level.

Answer 1

The principle of monetary neutrality suggests that changes in the money supply only affect nominal variables (like the price level) and do not impact real variables (like real GDP) in the long run. Therefore, an increase in the money supply would result in an increase in the price level, but it would not have a lasting impact on real GDP.

Given this understanding, the correct answer is:

b. increase the price level, but not real GDP.