Question: According to classical macroeconomic theory, money supply shocks are "neutral."

1. Explain what this means. Hint: see 5.7 of the textbook.
2. Based on that theory, how would a 5% increase in a nation’s money supply affect its real wage rate (W/P), all else equal (up, down, or no change, and by how much)?
3. According to the quantity theory of money, how would a 5% increase in the money supply affect the price of goods and services (P), all else equal (up, down, or no change, and by how much)?
4. To be consistent with both theories, what would have to happen to the nominal wage rate (W)? Explain.

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