Which statement best describes the long-run neutrality of money?

• A. In the long run, money affects both prices and real variables.
• B. In the long run, changes in the money supply affect only the price level; real variables revert to their natural levels.
• C. Money affects unemployment in the long run.
• D. Money has no effects in the long run.

Answer: (B)

Money can influence prices, but in the long run it does not change real economic outcomes. When the money supply grows, prices rise but the economy’s real pace of production, unemployment, and other real variables settle back to their natural or potential levels. So, the long-run effect is that the money supply shifts the price level while leaving real variables unchanged.

That’s why the statement describing changes in the money supply as affecting only the price level, with real variables reverting to their natural levels, is the best description. The other ideas imply money moves real variables or has no effect at all in the long run, which contradicts this long-run neutrality.