Question

2. If the price level rises how does this affect the nominal money supply? How does this affect real money supply? Fully explain your reasoning. (5 pts.)

Answer 1

The nominal value of a good is its value in terms of money.

The real value is its value in terms of some other goods ,services or bundle of goods.

We know that money loses its value every year. The same amount of money will purchase less and less every year as per the inflation rate( price level rise)

The Nominal Value of Money does not consider the effect of inflation ( since opportunity cost of capital and such other forces which cause the value of money to decrease in given period of time )

The real value of money takes into account inflation (and all such forces that cause the change value of money)

Therefore real money supply in economy helps to observe the real purchasing power of money given its value for a given period of time