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

a. increase real GDP and the price level.

b. increase the price level, but not real GDP.

c. increase real GDP, but not the price level.

d. increase neither the price level nor real GDP.

The correct answer is letter "B": increase the price level, but not real GDP.

Explanation:

The neutrality of money principle states that fluctuations in the money supply affect the prices of goods, services, and wages but not the growth in an economy or its real Gross Domestic Product (GDP). Austrian economist Friedrich A. Hayek (1899-1992) coined the term "neutrality of money" referring to a characteristic of money playing a neutral role in the growth of an economy.

Nowadays, specialists in the field believe the neutrality of money is a concept that applies in the long-run analysis of the productivity od a country.

answer/// real gdp decreases to y3 and the price level falls to p3;