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 2009 she earned $27.00 per hour, the price of a comic book was $9.00, and the price of a mandarin was $3.00.
Which of the following give the nominal value of a variable? Check all that apply.
A) Susan's wage is 3 comic books per hour in 2009.
B) The price of a mandarin is 0.33 comic books in 2009.
C) The price of a mandarin is $3.00 in 2009.
Which of the following give the real value of a variable? Check all that apply.
A) Susan's wage is $27.00 per hour in 2009.
B) The price of a comic book is $9.00 in 2009.
C) The price of a comic book is 3 mandarins in 2009.
Suppose that the Fed sharply increases the money supply between 2009 and 2014. In 2014, Susan's wage has risen to $54.00 per hour. The price of a comic book is $18.00 and the price of a mandarin is $6.00.
In 2014, the relative price of a comic book is (0.33 Mandarins / 3 Mandarins / $6.00 / $18.00).
Between 2009 and 2014, the nominal value of Susan's wage (decrease / increase / remain the same) and the real value of her wage (decrease / increase / remain the same) .
Monetary neutrality is the proposition that a change in the money supply (affects / does not affect) nominal variables and (does not affect / affects) real variables.