Question

32. 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. Neha spends all of her money on paperback novels and donuts. In 2011, she earned $27.00 per hour, the price of a paperback novel was $9.00, and the price of a donut was $3.00 Which of the following give the nominal value of a variable? Check all that apply Neha's wage is 3 paperback novels per hour in 2011 The price of a donut is 0.33 paperback novels in 2011 nThe price of a donut is $3.00 in 2011 Which of the following give the real value of a variable? Check all that apply Neha's wage is $27.00 per hour in 2011 The price of a paperback novel is $9.00 in 2011 The price of a paperback novel is 3 donuts in 2011 Suppose that the Fed sharply increases the money supply between 2011 and 2016. In 2016 Neha's wage has risen to $54.00 per hour. The price of a paperback novel is $18.00 and the price of a donut is $6.00 In 2016, the relative price of a paperback novel is 3 donuts Between 2011 and 2016, the nominal value of Neha's wage value of her increases and the real wage remains the same Monetary neutrality is the proposition that a change in the money supply affects nominal variables and does not affectreal variables

Answer 1

a) The price of the donut is $3 in 2011 is the nominal value.

b) Real value is measured in the goods ,option is C, the price of paper back novel is 3 donuts in 2011.

c) The relative price is 3 donuts for a novel.

the nominal wages increased after the increase in the moneys supply but the real wage i.e. the wage in terms of good is the same.

That is because of money dichotomy i.e. money only affects the nominal variable and not the real variable.