Question

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

Amy spends all of her money on comic books and beignets. In 2009, she earned $18.00 per hour, the price of a comic book was $9.00, and the price of a beignet was $2.00.

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

Amy's wage is $18.00 per hour in 2009.

Amy's wage is 2 comic books per hour in 2009.

The price of a beignet is $2.00 in 2009.

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

Amy's wage is 9 beignets per hour in 2009.

Amy's wage is $18.00 per hour in 2009.

The price of a comic book is 4.5 beignets in 2009.

Suppose that the Fed sharply increases the money supply between 2009 and 2014. In 2014, Amy's wage has risen to $36.00 per hour. The price of a comic book is $18.00 and the price of a beignet is $4.00.

In 2014, the relative price of a comic book is _ .

Between 2009 and 2014, the nominal value of Amy'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

Nominal variables are measured in monetary units. Any price or wage denominated in money,such as Amy's wage is $18 per hour in 2009,is an example of a nominal variable.

Real variables are measured in physical units.Any price or wage stated in terms of goods is a real variable.For example,in 2009 the relative price of a beignet is 4.5.

In 2014,the relative price of a comic book is 4.5 beignets.

Between 2009 and 2014, the nominal value of Amy's wage increases and the real value of her wage remains the same.

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

Reason-Amy's wage and the prices of comic books and beignets double as the Fed increases the money supply between 2009 and 2014.Since all prices have doubled,the relative price of a comic book remains 4.5.The money denominated,or nominal,value of Amy's wage increases over this period.Amy's real wage,however does not change.Amy's experience is consistent with monetary neutrality,which is the proposition that a change in the supply affects nominal variables but does not affect real variables.