Money is a means of payment, so money should only facilitate transactions. However, in reality money can have an impact on output and prices. There are various views on the relationship between money, output, and prices. According to Hayek (1931), money can affect prices and production (not neutral). Almost any change in the amount of money, whether it does influence the general price level or not, must always influence relative prices. It is relative prices which determine the amount and the direction of production. Almost any change in the amount of money must necessarily also influence production.
Keynes (1936) held the view that money can have an impact on output and prices. The primary effect of a change in the quantity of money on the quantity of effective demand is through its influence on the rate of interest. An increase in the money supply makes interest rates fall so that induces investment. In addition, it is also due to wage rigidity, where money-wages (or nominal wages) do not change as much as price changes (for example, because wages are set in advance on the employment contract). The rigidity of money-wages makes real wages fall when prices increase so that it has an impact on employment, aggregate demand, and output.
Friedman (1968) held the view that money can have an impact on output in the short run, but in the long run it can have an impact only on prices. Monetary expansion will tend initially to lower interest rates and in this and other ways to stimulate spending. Income and spending will start to rise. Initially, most of the rise in income will take the form of an increase in output and employment rather than in prices. However, because selling prices of products typically respond to an unanticipated rise in nominal demand faster than prices of factors of production, real wages received have gone down-though real wages anticipated by employees went up. Employment increases, but finally backs toward its initial level. The monetary expansion makes prices rise. Friedman mentioned that inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.
Ball, Mankiw, and Romer (1988) mentioned that an increase in nominal money with nominal prices fixed (the presence of price rigidity) leads to a first-order increase in real aggregate demand, and hence in real output. Meanwhile, according to Samuelson and Nordhaus (2009), in the short run money can affect aggregate demand and real output, while in the long run monetary expansion mainly affects the price level with little or no impact upon real output. Monetary changes will affect aggregate demand and real GDP in the short run when there are unemployed resources in the economy and the aggregate supply curve is relatively flat. As prices and wages become more flexible in the long run, monetary-policy changes tend to have a relatively small impact on output and a relatively large impact on prices.