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

• A. real variables such as output and employment
• B. nominal variables such as the price level
• C. the natural rate of unemployment
• D. the long-run growth rate of the economy

Answer: (B)

Verified step by step guidance

1. Understand the concept of monetary neutrality: it states that changes in the money supply only affect nominal variables and have no effect on real variables in the long run.
2. Identify nominal variables, which include variables measured in monetary units, such as the price level, nominal wages, and nominal GDP.
3. Identify real variables, which are adjusted for inflation and include output, employment, real wages, and real GDP.
4. Recall that according to monetary neutrality, an increase in the money supply will lead to a proportional increase in nominal variables like the price level, but will not affect real variables such as output or employment.
5. Conclude that the correct implication of monetary neutrality is that an increase in the money supply increases nominal variables such as the price level, not real variables or natural rates.