Final answer:
The correct option is B. both the price level and real output.
Changes in the money supply can affect both the price level and real output, as indicated by the equation of exchange, which demonstrates the interconnection between money supply, velocity, nominal GDP, price level, and real GDP.
Step-by-step explanation:
According to the equation of exchange, changes in the money supply can affect both the price level and real output. The equation of exchange, given by the formula Money Supply X Velocity = Nominal GDP = Price Level x Real GDP, demonstrates how the various components of an economy are interconnected. If velocity is constant, changes in the money supply can lead to proportional changes in nominal GDP, which can manifest as changes in the price level (inflation or deflation) and/or changes in real GDP (economic growth or contraction).
Therefore, alterations in the money supply have the potential to impact both inflation and economic activity, which includes real output and employment. However, the actual outcome depends on whether velocity, or the rate at which money circulates in the economy, remains constant or not. If it changes unpredictably, then the effects on nominal GDP and its components become less predictable as well.