3. The classical dichotomy and the neutrality of money The classical dichotomy i
ID: 1123658 • Letter: 3
Question
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. Alyssa spends all of her money on paperback novels and mandarins. In 2011, she earned $18.00 per hour, the price of a paperback novel was $9.00, and the price of a mandarin was $1.00. Which of the following give the nominal value of a variable? Check all that apply. Alyssa's wage is 2 paperback novels per hour in 2011. O The price of a mandarin is $1.00 in 2011 O The price of a mandarin is 0.11 paperback novels in 2011 Which of the following give the real value of a variable? Check all that apply Alyssa's wage is $18.00 per hour in 2011. O The price of a paperback novel is 9 mandarins in 2011 The price of a paperback novel is $9.00 in 2011. Suppose that the Fed sharply increases the money supply between 2011 and 2016. In 2016, Alyssa's wage has risen to $36.00 per hour. The price of a paperback novel is $18.00 and the price of a mandarin is $2.00. In 2016, the relative price of a paperback novel is Between 2011 and 2016, the nominal value of Alyssa's wage , and the real values her wage Monetary neutrality is the proposition that a change in the money su pply nominal variables and realExplanation / Answer
Nominal variable represents monetary value. It is always with units like dollar. Real variable are represented in physical units. It is in terms of goods.
Price is mandarin is $1 in 2011- is nominal variable.
Price of paperback novel is 9 mandarins in 2012- real variable
Relative price of paperback novel is 18/2=9
Between 2011 and 2016 nominal value of Alyssa wage increases and real value remains same. This is because wages doubles and so does price of mandarins.
Monetary neutrality is the proposition that change in money supply affects nominal value and does not affect real value.
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