Final answer:
Changes in the money supply can affect both the price level and real output according to the equation of exchange, with the impact depending on the stability of the velocity of money. The correct answer is option: b) both the price level and real output.
Step-by-step explanation:
According to the equation of exchange, which is represented as Money Supply X Velocity = Nominal GDP = Price Level x Real GDP, changes in the money supply can affect both the price level and real output. If the velocity of money is constant over time, a rise in the money supply will lead to a proportional rise in nominal GDP.
This rise can manifest as an increase in price levels (inflation) or an increase in real GDP (economic growth), or a combination of both. If the velocity of money changes unpredictably, then the effect of changes in the money supply on nominal GDP becomes unpredictable.