The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction.
Hilary spends all of her money on paperback novels and donuts. In 2010 she earned $27.00 per hour, the price of a paperback novel was $9.00, and the price of a donut was $3.00.
1. Which of the following give the nominal value of a variable? Check all that apply
a) The price of a donut is $3.00 in 2010.
b) Hilary's wage is 3 paperback novels per hour in 2010.
c) Hilary's wage is $27.00 per hour in 2010.
2. Which of the following give the real value of a variable? Check all that apply.
a) The price of a paperback novel is 3 donuts in 2010.
b) Hilary's wage is $27.00 per hour in 2010.
c) Hilary's wage is 9 donuts per hour in 2010.
Suppose that the Fed sharply increases the money supply between 2010 and 2015. In 2015, Hilary's wage has risen to $54.00 per hour. The price of a paperback novel is $18.00 and the price of a donut is $6.00.
3. In 2015, the relative price of a paperback novel is____(0.33 donuts/3 donuts/$6/$18)
4. Between 2010 and 2015, the nominal value of Hilary's wage___________(decreases increases remains the same), and the real value of her wage________(increase decrease remian the same)
5. Monetary neutrality is the proposition that a change in the money supply______(does not affect/affects)
Nominal variables and________( does not affect/affects) real variables