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.

Deborah spends all of her money on magazines and mandarins. In 2014, she earned $ 14.00 per hour, the price of a magazine was $ 7.00, and the price of a mandarin was $ 1.00

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

• The price of a mandarin is $ 1.00 in 2014 .

• Deborah's wage is 2 magazines per hour in 2014 .

• The price of a mandarin is 0.14 magazines in 2014 .

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

• The price of a magazine is 7 mandarins in 2014 .

• Deborah's wage is $ 14.00 per hour in 2014

• The price of a magazine is $ 7.00 in 2014 .

Suppose that the Fed sharply increases the money supply between 2014 and 2019 . In 2019 , Deborah's wage has risen to $ 28.00 per hour. The price of a magazine is $ 14.00 and the price of a mandarin is $ 2.00.

In 2019 , the relative price of a magazine is _______ 

Between 2014 and 2019 , the nominal value of Deborah'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

When price is denoted in terms of money then it provides nominal value of the variable.

So,

The following give the nominal value of a variable -

The price of a mandarin is $1.00 in 2014.

When price is denoted in terms of a good then it provides real value of the variable.

So,

The following given the real value of a variable -

The price of a magazine is 7 mandarins in 2014.

In 2019, the price of a magazine is $14.00 and the price of a mandarin is $2.00

With the price of $2.00 per unit, with $14.00, 7 mandarins can be purchased.

So,

In 2019, the relative price of a magazine is 7 mandarins.

Between 2014 and 2019, the nominal value of Deborah's wage increases, and the real value of her wage remains the same.

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