2. The classical dichotomy and the neutrality of money The classical dichotomy i
ID: 1160125 • Letter: 2
Question
2. 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. Juanita spends all of her money on magazines and donuts. In 2010, she earned $16.00 per hour, the price of a magazine was $8.00, and the price of a donut was $2.00 Which of the following give the nominal value of a variable? Check all that apply. Juanita's wage is 2 magazines per hour in 2010. Juanita's wage is $16.00 per hour in 2010 The price of a donut is 0.25 magazines in 2010. Which of the following give the real value of a variable? Check all that apply Juanita's wage is $16.00 per hour in 2010. Juanita's wage is 8 donuts per hour in 2010. The price of a magazine is $8.00 in 2010.Explanation / Answer
In given case, wage rate and price of goods is provided.
When wage rate and prices are classified in terms of dollars then the respective variables are called nominal variables.
When wage rate and prices are classified in terms of goods then the respective variables are called real variables.
Juanita's wage is $16 per hour in 2010 gives the nominal value of a variable.
Hence, the correct answer is the option (2) [Juanita's wage is $16 per hour in 2010].
Juanita's wage is 8 donuts per hour in 2010 gives the real value of a variable.
Hence, the correct answer is the option (2) [Juanita's wage is 8 donuts per hour in 2010].
In 2015,
Price of magazine is $16.
Price of donut is $4.
Price of magazine in terms of donut is (16/4) 4 donuts.
So,
In 2015, the relative price of a magazine in 4 donuts.
The wage rate of Juanita has doubled but the price of goods has also doubled.
So,
Between 2010and 2015, the nominal value of Juanita's wage increases, and the real value of her wage remains same.
Monetary neutrality is the preposition that a change in the money supply affects nominal variables and do not affect real variables.
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