Question

1. 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. Maria spends all of her money on paperback novels and beignets. In 2011, she earned $27.00 per hour, the price of a paperback novel was $9.00, and the price of a beignet was $3.00. Which of the following give the nominal value of a variable? Check all that apply. The price of a beignet is $3.00 in 2011. Maria's wage is $27.00 per hour in 2011. The price of a beignet is 0.33 paperback novels in 2011. Which of the following give the real value of a variable? Check all that apply. The price of a paperback novel is 3 beignets in 2011. Maria's wage is 9 beignets per hour 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, Maria's wage has risen to $54.00 per hour. The price of a paperback novel is $18.00 and the price of a beignet is $6.00. In 2016, the relative price of a paperback novel is . Between 2011 and 2016, the nominal value of Maria'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.

(Question 2) The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 11% per year, and both actual and expected inflation are equal to 4%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Time Period Nominal Interest Rate Expected Inflation Actual Inflation Expected Real Interest Rate Actual Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 11 4 4 Immediately after increase in MS 11 4 6 Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily benefits . Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will to per year.

Answer options are: borrower or lender

                                Rise or fall

Answer 1

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