Question

2. 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. Susan spends all of her money on comic books and mandarins. In 2012, she earned $14.00 per hour, the price of a comic book was $7.00, and the price of a mandarin was $2.00. Which of the following give the nominal value of a variable? Check all that apply. Susan's wage is $14.00 per hour in 2012. Susan's wage is 2 comic books per hour in 2012. The price of a mandarin is $2.00 in 2012. Which of the following give the real value of a variable? Check all that apply. Susan's wage is 7 mandarins per hour in 2012. Susan's wage is $14.00 per hour in 2012. The price of a comic book is 3.5 mandarins in 2012.

Answer 1

Q1) nominal variable ;

Option A & C.

Nominal variable imply the nominal values

Q2) option A & C

Real variable imply the purchasing power of money

3) Relative price of comic book = price of comic /price of mandarin

=14/4 = 3.5

4) Nominal wage has been increased from 14 to 28,

5)Real wage is unchanged ( remains the same ) as, real wage is measured in terms of purchasing power,

so buying power of wage is unchanged at comic book equals 28/14= 2

& For mandarin also unchanged at 28/4=7

6)Money neutrality implies that money supply affects only nominal variable .& Doesn't affect real variables