Final answer:
In the long term, money demand is primarily influenced by the price level due to the flexibility of prices and wages and the fact that economic output is determined by aggregate supply.
Step-by-step explanation:
In the long run, money demand largely depends on the price level but not the interest rate. A key concept to understand here is that in the long-term perspective, prices and wages are flexible and the economic output is primarily determined by aggregate supply, not aggregate demand. This is illustrated by the neoclassical model which shows that if aggregate demand rises rapidly, it leads only to inflationary pressures, with no long-term effect on real GDP or the natural unemployment rate.
In contrast to the short-run where monetary policy can have a significant impact on both the economy and the interest rate, in the long run, the overall health of the economy as measured by real GDP is not affected by fluctuations in aggregate demand. This occurs because, in the long run, the aggregate supply is inelastic, represented by a vertical long-run aggregate supply (LRAS) curve in the neoclassical model. Price level changes, but the output remains at its natural level, which is why money demand is more affected by the price level than interest rates in the long run.