Question

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.

Rina spends all of her money on comic books and donuts. In 2011, she earned $15.00 per hour, the price of a comic book was $5.00, and the price of a donut was $3.00.

Which of the following give the nominal value of a variable? Check all that apply.

The price of a donut is $3.00 in 2011.

The price of a donut is 0.6 comic books in 2011.

Rina's wage is $15.00 per hour in 2011.

Which of the following give the real value of a variable? Check all that apply.

The price of a comic book is 1.67 donuts in 2011.

The price of a comic book is $5.00 in 2011.

Rina's wage is 5 donuts per hour in 2011.

Suppose that the Fed sharply increases the money supply between 2011 and 2016. In 2016, Rina's wage has risen to $30.00 per hour. The price of a comic book is $10.00 and the price of a donut is $6.00.

In 2016, the relative price of a comic book is   .

Between 2011 and 2016, the nominal value of Rina's wage   , and the real value of her wage   .

Monetary neutrality is the proposition that a change in the money supply   nominal variables and   real variables.

Answer 1

1. Nominal value is the value in terms of money.

The price of a donut is $3.00 in 2011.

Rina's wage is $15.00 per hour in 2011.

2. Real values means value in terms of goods and services.

The price of a comic book is 1.67 donuts in 2011.

Rina's wage is 5 donuts per hour in 2011.

3. Relative price of comic book = Price in 2011/Price in 2016 = 5/10 = 1/2

4. Nominal wage increases from 15 to 30.

Real wage remains same

5. affects nominal variables and not real variables