Question 3 Chapter 17 Version 2 The classical dichotomy and the neutrality of money
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Nominal variables are measured in
... [Show More] monetary units. Any price or wage denominated in money, such as Valerie'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 2011 the relative price of a mandarin is 0.29 magazines.
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Valerie's wage and the prices of magazines and mandarins double as the Fed increases the money supply between 2011 and 2016. Since all prices
have doubled, the relative price of a magazine remains . The money-denominated, or nominal, value of Valerie's wage
increases over this period. Valerie's real wage, however, does not change. Her relative wage is
still or after the increase in the money supply. Valerie's experience is
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.
Valerie spends all of her money on magazines and mandarins. In 2011 she earned $14.00 per hour, the price of a magazine was $7.00, and the price of
a mandarin was $2.00.
Which of the following give the nominal value of a variable? Check all that apply.
Valerie's wage is $14.00 per hour in 2011.
Valerie's wage is 2 magazines per hour in 2011.
The price of a mandarin is $2.00 in 2011.
Points: 0.67 / 1
Which of the following give the real value of a variable? Check all that apply.
Valerie's wage is 7 mandarins per hour in 2011.
Valerie's wage is $14.00 per hour in 2011.
The price of a magazine is 3.5 mandarinsin 2011.
Points: 0.67 / 1
Suppose that the Fed sharply increases the money supply between 2011 and 2016. In 2016, Valerie's wage has risen to $28.00 per hour. The price of a
magazine is $14.00 and the price of a mandarin is $4.00.
In 2016, the relative price of a magazine is .
Points: 1 / 1
Between 2011 and 2016, the nominal value of Valerie'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 does not affect real variables.
Points: 1 / 1
consistent with monetary neutrality, which is the proposition that a change in the money supply affects nominal variables but does not affect real
variables. [Show Less]