In the long run, changes in the money stock are neutral with respect to real GDP. This implies which of the following is true?

• A. Always true
• B. Sometimes true
• C. Never true
• D. Not necessarily true

Answer: (A)

Money is neutral in the long run: changes in the money stock affect nominal variables, not real GDP. The quantity equation MV = PY shows that if M changes and the real economy (Y) tends to grow at its real trend while the velocity of money is stable, the price level P adjusts to keep real output determined by real factors (technology, resources, preferences). So increasing the money supply raises prices rather than real output, leaving real GDP unchanged in the long run. That’s why the statement is always true. In the short run, price and wage rigidities can allow money to temporarily influence real GDP, but over the long run those effects vanish and real GDP returns to its natural level.