3. The classical dichotomy and the neutrality of money The classical dichotomy i

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 Lucia spends all of her money on paperback novels and donuts. In 2009, she earned $16.00 per hour, the price of a paperback novel was $8.00, and the price of a donut was $1.00. Which of the following give the nominal value of a variable? Check all that apply. Lucia's wage is $16.00 per hour in 2009. The price of a donut is 0.13 paperback novels in 2009 The price of a donut is $1.00 in 2009. Which of the following give the real value of a variable? Check alf that apply Lucia's wage is 16 donuts per hour in 2009. The price of a paperback novel is $8.00 in 2009. The price of a paperback novel is 8 donuts in 2009 Suppose that the Fed sharply increases the money supply between 2009 and 2014. In 2014, Lucia's wage has risen to $32.00 per hour. The price of a paperback novel is $16.00 and the price of a donut is $2.00 In 2014, the relative price of a paperback novel is ,and the real Between 2009 and 2014, the nominal value of Lucia's wage value of her wage Monetary neutrality is the proposition that a change in the money supply nominal variables and real variables

Explanation / Answer

a) Nominal value variable is those which are expressed in terms of money. The statements representing nominal value are "A", Lucia's wage is $16 per hour in 2009 and "C", the price of a paperback novel is 8 doughnuts in 2009.

b) Real wages are expressed in terms of the relative value of goods.

The answer is "the price of a paperback novel is 8 doughnuts in 2009."

c) In 2014, the relative price of a paperback novel is 8 doughnuts.  

d) Nominal wages of Lucia "doubled" and the real wages remained the same.

e) Change in the money supply affects only the nominal value and doesn't affect the real variable.  

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