Question

The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction.
Deborah spends all of her money on magazines and donuts. In 2008 she earned $27.00 per hour, the price of a magazine 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.
a. The price of a donut is 0.33 magazines in 2008.
b. The price of a donut is $3.00 in 2008.
c. Deborah's wage is 3 magazines per hour in 2008.

Which of the following give the real value of a variable? Check all that apply.
a. The price of a magazine is $9.00 in 2008.
b. The price of a magazine is 3 donuts in 2008.
c. Deborah's wage is $27.00 per hour in 2008.

Suppose that the Fed sharply increases the money supply between 2008 and 2013. In 2013, Deborah's wage has risen to $54.00 per hour. The price of a magazine is $18.00 and the price of a donut is $6.00.

In 2013, the relative price of a magazine is:________

Between 2011 and 2016, the nominal value of Maria's wage _______________and the real value of her wage ____________________-
Monetary neutrality is the proposition that a change in the money supply ___________________ nominal variables and _____________real variables.

Answer 1

Answer:

Nominal variable - Price of a donut is $3.00 in 2008

Real variable- Price of a magazine is 3 donuts in 2008.

Explanation:

In 2008 the price of a magazine was $9.00. While the price of a donut was $3.00. Deborah's income was $27.00 per hour.

Nominal variable's are those which are expressed in terms of money. While, real variables are those variables which are expressed in terms of other goods or services.

The nominal variables will include:

a. The price of a donut is $3.00 in 2008.

The other two options are not nominal variables as they are expressed in terms of the other variable.

The following variables give us the real value of a variable:

b. The price of a magazine is 3 donuts in 2008.

Deborah's wage and price of a magazine are both nominal variables. They are not expressed in terms of any other variable.

In 2013, Deborah's wage is $54.00. The price of a magazine is $18.00 and price of a donut is $6.00.

Relative price is the price price of a good expressed in terms of the other good. The price of magazine in 2013 is $18.00. While, price of donut is $6.00.

$Relative price = \frac{Price of a magazine}{Price of a donut} \\ = \frac{18}{6}\\ = 3$

Thus, in 2013, the relative price of a magazine is 3 donuts.

As can be seen that from 2008 - 2013, the wage doubles. But at the same time the price of both magazine and donuts also doubles. This can be seen from the relative purchasing power of income. So, between 2008-2013 the nominal value of wage increased and the real value of her wage remained the same.

Monetary neutrality is the proposition that a change in the money supply affects nominal variables and does not affect real variables.