Question

In: Economics

Identify whether the following is a nominal variable or a real variable. Justify your answer. Price...

Identify whether the following is a nominal variable or a real variable. Justify your answer.

  • Price of a compact disc  


  • W/P:


  • Price of a pizza:
  • Nominal GDP:
  • Interest paid by bank on deposits in bank accounts:
  • Real GDP:


  • Price of CD/Price of Pizza


  • Real interest rate:


Classical economists suggest that Money is   

This is however true in the long run.

Solutions

Expert Solution

In economics, Nominal variables are values measured in money value or prices. Real variables are expressed afrer adjusting foe different price levels.

  • Price of a compact disc   Nominal variable. As the price of a compact disc is expressed in money value.
  • W/P: Real Variable. As the wages are adjusted for the price level.
  • Price of a pizza:Nominal variable. As the price of a pizza is expressed in money value
  • Nominal GDP: Nominal variable. As the nominal GDP is expressed in money value
  • Interest paid by bank on deposits in bank accounts: Nominal variable. As the interest paid by bank does not account for inflation.
  • Real GDP: Real variable. As the Real GDP accounts inflation changes.
  • Price of CD/Price of Pizza Real variable As the price of CDs expressed in terms of price of pizza. It is not a money value but a real variable.
  • Real interest rate: Real variable. As it accounts for inflation. Real interest rate is equal to nominal interest rate minus inflation.

Classical economists suggest that Money is NEUTRAL. This is however true in the long run.

Neutrality of money is the idea that change in money stock affects only the nominal variable and not the real variable.

If it helps kindly upvote.

For doubts comment below.

Rahul Sunny answered 1 year ago
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