Question

10. An assistant professor of economics gets a $100-a-month raise, but then she figures that with her current monthly salary she can't buy as many goods as she could last year. What has happened to her real and nominal wage? (1 mark) er real and awaren lerroan were alle eral wa t erminal wage has eral wage has fallen bu hermal wage has 11. Which statement best defines the velocity of money? (1 mark) e the gam sem of the money GDP 12. In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased the money supply. How might the central banks have done this? (1 mark) purchasing hands the open market which would have med the value of money Pyling bands the open market, which would have lowered the value of m y prochasing bonds on the open market which would have lowered the value of 13. When the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the money demand function? (1 mark) and that higher PC pople want to hold m y slopes downwand became a higher prices people want to hold more slopes downward w h ere people want to hold less money slopes upward because at higher prices ople want to hold less money 14. Your boss gives you an increase in the number of dollars you carn per hour, from Sil to S12. How does this change your nominal and real wages? (1 mark) This increase in pay makes your sminal wage increase. If your hominal wage rose by a percentage than the price level, then your real was also increase This i s a paymake your own . If you were by progethan the price level, then your meal wage decreased This increase makes you mal w ire. If your real by art then the then you wage increased This increase pay makes you alwage diere . If your w e by a N a than the price level, then your wage dierend 15. Assuming that is constant, what could result from an increase in M in the quantity equation? (1 mark) 16. Which statement best characterizes the effects of monetary policy? (1 mark) a y policy is not in the short and the long therefore does not affect M Mentary policy is not seg u it may have effects on rol es in the short Mentary policy and Mentary policy has profund sta a r s in the short and the long l variables in the long run, but is neural in the

Answer 1

10. d) her real wage has fallen, but her nominal wage has risen. Given that she gets a raise of $100 on a monthly basis it is no doubt her nominal wage has risen, but since she can afford lesser in terms of goods than she could last year, it means her real wage has fallen. This points out the difference between the two, where the nominal wage is the wage received in the form of money, while real wage is the purchasing power of that money.

11. d) it is the average number of times per year a dollar is spent. That is the frequency with which a dollar is used in a year to transact goods and services.

12. d) by purchasing bonds on the open market, which would have lowered the value of money. When the central banks purchase bonds on the open market it means they're releasing more money into the market to raise the money supply. This increase in the money supply implies an increase in the amount of cash in the economy and this makes the money less valuable.

13. d) it slopes downward because at higher prices people want to hold less money. At higher prices, people would want to hold a lesser amount of their wealth in the form of money as it would be more lucrative to invest in bonds or other alternatives when interest rates are high.

14. a) This increase in pay makes your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased. Following the same logic explained in question 10, an increase in the amount of the wages received will always imply an increase in nominal wage as more money is received. The real wage, i.e. the purchasing power increases only if the increase in income exceeds the price level.

15. b) an increase in the real GDP or d) an increase in the price level or both b) and d). Given the identity is MV = PY and V is constant, an increase in M has to necessarily mean an increase in P or Y or both P and Y, i.e. price level as well as real GDP.

16. b) Monetary policy is neutral in the long run, but it may have effects on real variables in the short run.