Chapter 32, Problem 5MCQ

To determine

The correct option regarding the relation between the money supply and the price level.

Explanation of Solution

The given question relates to the phenomenon of Neutrality of money. According to the notion of money neutrality, commonly known as neutral money, changes in the money supply only have an impact on nominal factors and not actual variables. In simple words, the Federal Reserve (Fed) and central banks' printing of money can affect prices and salaries but not really the country's economic production or structure.

Although several modern economists continue to hold the view that neutrality is anticipated in the long run once money has circulated all through the economy, modern variants acknowledge that changes in the money supply may have an impact on production or unemployment levels in the short term.