How does the concept of "money neutrality" relate to classical economics?

The concept of "money neutrality" is a central idea in classical economics, emphasizing that changes in the money supply do not affect real economic variables in the long run, but only nominal variables such as prices and wages. This principle suggests that while increasing the money supply can lead to higher prices in the short term, it does not lead to increases in real output or employment over the long term.

In classical theory, the economy is viewed as self-adjusting, and any increase in the money supply eventually results in proportional increases in price levels without impacting real growth. Therefore, if the money supply changes, the effect will manifest in nominal variables, such as the price level, while real variables like output remain unchanged in the long run.

This perspective highlights the distinction between nominal and real variables, underpinning the belief that monetary policy, while capable of influencing prices temporarily, does not have lasting effects on the real economy. Consequently, changes in money supply are considered neutral with respect to real economic activity in the long run.