With $900, 112 lobster rolls can be purchased at the initial price of $8.00 per lobster roll. Monetary neutrality is the proposition that changes in the money supply do not affect real variables, such as the number of lobster rolls produced. If monetary neutrality holds, a 50% increase in the money supply will be fully reflected in the dollar price of a lobster roll. Thus, the price of a lobster roll will rise by 50% as well, from $8.00 to $12.00. The price increase causes the purchasing power of money to decline, so that $900 can now buy only $900$12.00=75 lobster rolls$\frac{\mathrm{\$900}}{\mathrm{\$12.00}}=75\mathrm{ }\mathrm{lobster rolls}$.

It is important to note that the increase in the money supply impacts only the purchasing power of money (including money in non-inflation-adjusted accounts and assets) held while the government is printing money. Since wages tend to rise with the overall price level, nominal wages will rise to reflect changes in the quantity of money, and the purchasing power of earnings will not be affected in the long run.

When the government pays its debts by printing money, the value of money will decline, a phenomenon known as an inflation tax. Specifically, $900 will purchase fewer lobster rolls—approximately 75 compared with 112 before the government's decision to print money. By printing money in order to pa