Question 3 Chapter 17 The classical dichotomy and the neutrality of money version 3
3.5 donuts
Explanation: Close Explanation
Nominal variables are
... [Show More] measured in monetary units. Any price or wage denominated in money, such
as Susan'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 2010 the
relative price of a donut is 0.29 comic books.
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.
Susan spends all of her money on comic books and donuts. In 2010 she earned $14.00 per hour, the price
of a comic book was $7.00, and the price of a donut was $2.00.
Which of the following give the nominal value of a variable? Check all that apply.
Susan's wage is $14.00 per hour in 2010.
Susan's wage is 2 comic books per hour in 2010.
The price of a donut is $2.00 in 2010.
Points: 1 / 1
Which of the following give the real value of a variable? Check all that apply.
Susan's wage is 7 donuts per hour in 2010.
Susan's wage is $14.00 per hour in 2010.
The price of a comic book is 3.5 donuts in 2010.
Points: 1 / 1
Suppose that the Fed sharply increases the money supply between 2010 and 2015. In 2015, Susan's wage
has risen to $28.00 per hour. The price of a comic book is $14.00 and the price of a donut is $4.00.
In 2015, the relative price of a comic book is .
Points: 1 / 1
increases
remains the same
affects
does not affect
Explanation: Close Explanation
Susan's wage and the prices of comic books and donuts double as the Fed increases the money supply
between 2010 and 2015. Since all prices have doubled, the relative price of a comic book
remains . The money-denominated, or nominal, value of Susan's wage increases
over this period. Susan's real wage, however, does not change. Her relative wage is
still or after the increase in the
money supply. Susan'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 2010 and 2015, the nominal value of Susan's wage and the real value of
her wage .
Points: 1 / 1
Monetary neutrality is the proposition that a change in the money supply nominal
variables and real variables.
Points: 1 / 1 [Show Less]