Final answer:
According to the basic classical model, money is neutral in the long run, meaning monetary policy changes affect price levels but do not have a long-term impact on output or unemployment rates.
Step-by-step explanation:
The basic classical model posits that in the long run, money is neutral—meaning monetary policy primarily affects the price levels rather than the real variables such as output or unemployment. According to this model, as seen in the neoclassical view, when an expansionary monetary policy is implemented, it causes a shift in aggregate demand (AD) from the original level to a new level (e.g., from AD to AD₁), leading to an increase in the price level (from Po to P₁).
However, this adjustment to a new equilibrium (from Eo to E₁) doesn't impact the long-run output or unemployment rate. Essentially, a change in money supply leads to proportional changes in price levels without affecting real GDP or unemployment, which are determined by real economic factors. In this view, low inflation is seen as conducive to a healthy and growing economy.