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

the price level, but not real GDP.

Explanation:

Monetary Neutrality:

• The principle of monetary neutrality posits that changes in the money supply only affect nominal variables (such as the price level) and do not have an impact on real variables (such as real GDP) in the long run.
• This concept is rooted in classical economic theory, which assumes that in the long run, the economy is at full employment and real variables are determined by real factors like technology and resources, not by the amount of money in circulation.

Implications:

1. Price Level:
   • An increase in the money supply leads to higher aggregate demand. In the short run, this can result in increased output and employment.
   • However, in the long run, as the economy adjusts, the primary effect of an increased money supply is to raise the price level.
2. Real GDP:
   • According to the principle of monetary neutrality, real GDP is not affected by changes in the money supply in the long run. Real GDP is determined by factors such as labor, capital, and technology, not by the amount of money circulating in the economy.

Sources:

1. Investopedia on Monetary Neutrality:
   • Investopedia explains that monetary neutrality implies that changes in the money supply affect prices but do not impact real economic output or unemployment in the long run. (Investopedia)
2. Federal Reserve:
   • The Federal Reserve notes that in the long run, monetary neutrality means that changes in the money supply only influence nominal variables like the price level, leaving real variables like output and employment unchanged. (Federal Reserve Education)

Therefore, the correct answer is: the price level, but not real GDP.

the price level, but not real GDP.