3. The classical dichotomy and the neutrality of money The classical dichotomy i
ID: 2440458 • 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.
Caroline spends all of her money on magazines and donuts. In 2011, she earned $18.00 per hour, the price of a magazine was $9.00, and the price of a donut was $2.00.
Which of the following give the nominal value of a variable? Check all that apply.
The price of a donut is $2.00 in 2011.
Caroline's wage is 2 magazines per hour in 2011.
Caroline's wage is $18.00 per hour in 2011.
Which of the following give the real value of a variable? Check all that apply.
The price of a magazine is 4.5 donuts in 2011.
Caroline's wage is $18.00 per hour in 2011.
Caroline's wage is 9 donuts per hour in 2011.
Suppose that the Fed sharply increases the money supply between 2011 and 2016. In 2016, Caroline's wage has risen to $36.00 per hour. The price of a magazine is $18.00 and the price of a donut is $4.00.
In 2016, the relative price of a magazine is _(.22 donuts, $4.00, 4.5 donuts, $18)__
Between 2011 and 2016, the nominal value of Caroline's wage __(decreases/increases/remains the same)_ , and the real value of her wage __(decreases/increases/remains the same)_ .
Monetary neutrality is the proposition that a change in the money supply _(affects/doesn't affect)__ nominal variables and _affects/doesn't affect)___ real variables.
Explanation / Answer
The nominal value is the value of the thing in terms of money. the statement representing nominal value will be "the price of donuts is $2.00 in 2011" and "Caroline wage is $18.00 per hour".
The real value representing statements are: "THe price of the magazine is 4.5 donuts in 2011" and "Caroline wage is 9 donuts per hour".
IN 2016, the relative price of a magazine is "4.5 donuts"
The nominal value of Caroline's wage "increased"
And the real value of her wage "remains the same".
Monetary neutrality affects the nominal supply but real value of money remains the same.
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