What does the long-run neutrality of money mean for real variables like output and employment?

• A. Money affects both price level and real variables in the long run.
• B. Money affects only the price level; real variables such as output and employment return to their natural levels.
• C. Money affects unemployment in the long run.
• D. Money has no effect on the economy in the long run.

Answer: (B)

Long-run neutrality of money means that changes in the money supply affect only nominal variables, not real ones. In the long run, prices and wages adjust so that the overall price level moves in line with the money supply, while real output and employment are determined by real factors like technology, resources, and preferences. So, although you can see inflation or a higher price level when the money supply grows, the economy’s real side—output and jobs—returns to their natural levels. Monetary policy can have short-run effects by shifting demand, but these effects vanish as the price level fully adjusts. That's why the correct idea is that money affects only the price level; real variables such as output and employment revert to their natural levels.