Quantity Theory of Money vs Money Neutrality

A theory stating that the general price level of goods and services is directly proportional to the amount of money in circulation.

It is expressed by the equation MV = PQ, where money supply times velocity equals price level times output. The theory assumes velocity and output are stable in the long run, so changes in money supply primarily affect prices, not real output.

Money neutrality is the idea that changes in the money supply affect only nominal variables (prices, wages) in the long run, leaving real GDP and employment unchanged.

In the long run, a one-time increase in the money supply raises the price level proportionally but leaves real output, employment, and the real interest rate unchanged, money is a 'veil' over the real economy. This follows from the quantity theory (MV = PQ with V and Q fixed in the long run) and underpins the vertical LRAS. Most economists accept long-run neutrality but reject short-run neutrality, since sticky prices and wages let monetary changes affect real output temporarily. The related idea of superneutrality holds that even the growth rate of money does not affect real variables.