Final answer:
An increase in the money supply growth rate will increase nominal interest rates, according to the classical model's concept of monetary neutrality, which does not affect real GDP or real variables in the long run.
Step-by-step explanation:
The concept of monetary neutrality in the classical model posits that changes in the money supply affect only the price level and nominal variables, but not real variables such as real GDP, real interest rates, or the equilibrium quantity of output. According to this view, an increase in the money supply growth rate will lead to an inflationary increase in the nominal GDP and nominal interest rates.
Therefore, An increase in the money supply growth rate will increase nominal interest rates. The classical model suggests that money is 'neutral' in the sense that it affects price levels but not the actual output or real interest rates.
The notion of monetary neutrality is based on the idea that the money supply does not have a long-term impact on real variables like real GDP, real interest rates, or national saving and domestic investment. The concept is illustrated in neoclassical economics, where money supply changes lead to price level adjustments without affecting the economy's output or employment levels in the long run. This can be seen in the classical representation of the quantity theory of money, which assumes a constant velocity of money. As such, a rise in money supply results in proportional changes in nominal GDP. If velocity is predictable, the effect of money supply changes on nominal GDP is also predictable. Conversely, if velocity is unpredictable, the effect on nominal GDP cannot be foreseen. In the short term, an increase in the money supply can affect nominal interest rates due to higher inflation expectations, but this does not change real interest rates or real GDP, which are determined by factors such as productivity and labor supply.