Question

The classical dichotomy refers to the separation of

A. prices and nominal interest rates.

B. taxes and government spending.

C. decisions made by the public and decisions made by the government.

D. real and nominal variables.

Answer 1

D) real and nominal variables.

Hume and his contemporaries suggested that economic variables should be divided into two groups, The first group consists of nominal variables-variables measured in monetary units. The second group consists of real variables-variables measured in physical units. For example, the income of corn farmers is a nominal variable because it is measured in dollars, whereas the quantity of corn they produce is a real variable because it is measured in bushels. Nominal GDP is a nominal variable because it measures the dollar value of the economy’s output of goods and services; real GDP is a real variable because it measures the total quantity of goods and services produced and is not influenced by the current pr ices of those goods and services. The separation of real and nominal variables is now called the classical dichotomy. (Adichotomy is a division into two groups, and classical refers to the earlier economic thin kers.)