What does the theory of "monetary neutrality" suggest about the relationship between the money supply and real economic variables?

The theory of monetary neutrality suggests that changes in the money supply do not affect real economic variables in the long run. This principle is based on the idea that while increasing the money supply can influence nominal variables such as prices and wages in the short term, it does not have a lasting impact on real output, employment, or other real economic factors over time.

In the long run, adjustments in price levels will offset any nominal changes caused by an increase in the money supply, leading to a situation where the real economy returns to its natural level of output and employment. Essentially, monetary neutrality implies that money is neutral in its effects on real economic activity, meaning that while it may temporarily affect the economy, ultimately, the core real variables remain unchanged in the long run. This distinction is important when analyzing the impacts of monetary policy and understanding the dynamics of inflation versus real economic growth.