Question 3 Chapter 17 The classical dichotomy and the neutrality of money
3.5 beignets
Explanation: Close Explanation
Nominal variables are measured in
... [Show More] monetary units. Any price or wage denominated in money, such
as Dina's $14.00 per hour wage, is an example of a nominal variable. Real variables are measured in
physical units. Any price or wage stated in terms of goods is a real variable. For example, in 2009 the
relative price of a beignet is 0.29 paperback novels.
3. The classical dichotomy and the neutrality of money
The classical dichotomy is the separation of real and nominal variables. The following questions test your
understanding of this distinction.
Dina spends all of her money on paperback novels and beignets. In 2009 she earned $14.00 per hour, the
price of a paperback novel was $7.00, and the price of a beignet was $2.00.
Which of the following give the nominal value of a variable? Check all that apply.
The price of a beignet is $2.00 in 2009.
The price of a beignet is 0.29 paperback novels in 2009.
Dina's wage is 2 paperback novels per hour in 2009.
Points: 0.33 / 1
Which of the following give the real value of a variable? Check all that apply.
The price of a paperback novel is 3.5 beignets in 2009.
The price of a paperback novel is $7.00 in 2009.
Dina's wage is $14.00 per hour in 2009.
Points: 0.33 / 1
Suppose that the Fed sharply increases the money supply between 2009 and 2014. In 2014, Dina's wage
has risen to $28.00 per hour. The price of a paperback novel is $14.00 and the price of a beignet is $4.00.
In 2014, the relative price of a paperback novel is .
Points: 1 / 1
increases
remains the same
affects
does not affect
Explanation: Close Explanation
Dina's wage and the prices of paperback novels and beignets double as the Fed increases the money
supply between 2009 and 2014. Since all prices have doubled, the relative price of a paperback novel
remains . The money-denominated, or nominal, value of Dina's wage
increases over this period. Dina's real wage, however, does not change. Her relative wage is
still or after the increase
in the money supply. Dina's experience is consistent with monetary neutrality, which is the proposition
that a change in the money supply affects nominal variables but does not affect real variables.
Between 2009 and 2014, the nominal value of Dina's wage and the real value of
her wage .
Points: 0 / 1
Monetary neutrality is the proposition that a change in the money supply nominal
variables and real variables.
Points: 1 / 1 [Show Less]