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The classical dichotomy is the separation of real and nominal variables. The following questions test your...

The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction.

Megan spends all of her money on magazines and mandarins. In 2012, she earned $18.00 per hour, the price of a magazine 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.

Megan's wage is $18.00 per hour in 2012.

Megan's wage is 2 magazines per hour in 2012.

The price of a mandarin is 0.11 magazines in 2012.

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

Megan's wage is 18 mandarins per hour in 2012.

Megan's wage is $18.00 per hour in 2012.

The price of a magazine is $9.00 in 2012.

Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, Megan's wage has risen to $36.00 per hour. The price of a magazine is $18.00 and the price of a mandarin is $2.00.

In 2017, the relative price of a magazine is   .

Between 2012 and 2017, the nominal value of Megan'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.

Solutions

Expert Solution

Nominal variables are measure in monetary terms.

Following give the nominal value of a variable

  • Megan's wage is $18.00 per hour in 2012.

Real Variables are measured in physical units.

Following give the real value of a variable.

  • Megan's wage is 18 mandarins per hour in 2012

----------------------------------------------------------------------

In 2012, the Megan's wage rate = $18; Price of magazine = $9 ; Price of mandarin = $1

In 2017, the Megan's wage rate= $36; Price of magazine = $18; Price of mandarin = $2.

In 2017, relative price of a magazine is 9 mandarin.

relative price of a magazine in 2017 = (Price of magazine in 2017 / Price of Mandarin in 2017)

relative price of a magazine in 2017 = ($18 / $2) = 9 Mandarin.

------------------------------------------------

Between, 2012 and 2017, the nominal value of Megan's wage increase, and the real value of her wage remains the same.

Monetary neutrality is the proposition that a change in the money supply affects the nominal variables and does not affect the real variables.

Note: Real wage in terms of magazines in 2012 = (Nominal wage in 2012 / Price of magazine in 2012)

Real wage in terms of magazines in 2012 = ($18 / $9) = 2 magazines.

Real wage in terms of magazines in 2017 = (Nominal wage in 2017 / Price of magazine in 2017)

Real wage in terms of magazines in 2017 = ($36 / $18) = 2 magazines

Hence, the real wage remains same.

Rahul Sunny answered 9 months ago
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