What does the neutrality of money propose?

The neutrality of money suggests that in the long run, changes in the quantity of money do not influence real quantities of goods and services produced in the economy, such as real output or employment. Instead, any alteration in the money supply is reflected solely in changes to price levels. This concept hinges on the idea that while an increase in the money supply can lead to higher nominal prices, it does not have lasting effects on real economic output, which is determined by factors like technology and resources rather than the amount of money in circulation.

This principle is essential in classical and neoclassical economic theories where it is accepted that money is neutral in the long run. Thus, when the money supply expands, consumers have more money to spend, which tends to drive up prices rather than increase the quantity of goods and services available. Therefore, in the long term, changes in currency do not affect the economy's productive capacity, emphasizing that real output remains unaffected while price levels adjust.