Final Answer:
Monetary neutrality posits that changes in the money supply do not affect real economic variables in the long run. So the correct option is b) Nominal GDP and c) Inflation rate do not change when the money supply increases.
Step-by-step explanation:
Monetary neutrality posits that changes in the money supply do not affect real economic variables in the long run. Nominal GDP is the product of the quantity of goods and services produced (real GDP) and the price level (inflation rate). When the money supply increases, both prices and the quantity of goods and services produced rise proportionally, resulting in a higher nominal GDP. Real GDP, however, is determined by factors such as technology, labor, and capital and is not directly influenced by changes in the money supply. Therefore, real GDP remains unchanged in the long run.
Similarly, the inflation rate is a measure of how much prices are rising. In the long run, an increase in the money supply leads to a proportional increase in prices, maintaining the same inflation rate. The unemployment rate, on the other hand, is determined by labor market conditions and is not directly influenced by changes in the money supply in the long run. Therefore, nominal GDP and the inflation rate are the variables that do not change when the money supply increases, assuming monetary neutrality holds.
In mathematical terms, the equation for nominal GDP (NGDP) is NGDP = Real GDP * Price Level. When the money supply increases, the price level rises, resulting in a higher nominal GDP. Meanwhile, real GDP remains constant. Similarly, the inflation rate is calculated as the percentage change in the price level over time, and in the long run, it adjusts proportionally to changes in the money supply, keeping the inflation rate constant. So the correct option is b) Nominal GDP and c) Inflation rate do not change when the money supply increases.