The principle of monetary neutrality implies that an increase in the money supply will:
A)decrease the price level
B)lower nominal interest rates
C)lower the unemployment rate
D)not affect real interest rates

Question

Quizplus · Accepted Answer

The principle of monetary neutrality argues that changes in the money supply will only affect nominal variables and not real variables. Real interest rates, which are adjusted for inflation, are a measure of the true cost of borrowing and lending, and are not influenced by changes in the money supply. Therefore, an increase in the money supply will not affect real interest rates.

The Principle of Monetary Neutrality Implies That an Increase in the Money