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Mind Tap-Cengage Learning ?-> ci ? Secure! https://ng.cengage.com/ ::: Apps S HealthSun Portal O Paycom . BOA O CHASE 5% MINDTAP static/nb/ui/evo/index.htmi?deploymentld-57461018100041491026330904&elSBN-9781337622042;&snapsho; ,?? Walmart Credit Card -P TJX D Victoria's Secret An. Free Cred ? CAPITAL ONE Login FPL From Cengage HW.A:17.1: Chapter 17- Aplia Homework Back to Assignment Attempts: Average: /5 3. 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. Lucia spends all of her money on paperback novels and beignets. In 2010, she earned $14.00 per hour, the price of a paperback novel was $7.00, and the price of a beignet was $2.00. Which of the following give the nominal value of a variable? Check all that apply. O The price of a beignet is 0.29 paperback novels in 2010. O Lucia's wage is 2 paperback novels per hour in 2010 Lucia's wage is $14.00 per hour in 2010. Which of the following give the real value of a variable? Check all that apply O The price of a paperback novel is $7.00 in 2010. O Lucia's wage is $14.00 per hour in 2010. O Lucia's wage is 7 beignets per hour in 2010. 2015, Lucia's wage has risen to $28.00 per hour. The price of a Suppose that the Fed sharply increases the money supply between 2010 and 2015. I paperback novel is $14.00 and the price of a beignet is $4.00 In 2015, the relative price of a paperback novel is Between 2010 and 2015, the nominal value of Lucia's wage ,and the real value of her wage Monetary neutrality is the proposition that a change in the money supply variables nominal variables and real Grade It Now Save & Continue Continue without saving

Explanation / Answer

Solution: Nominal and real variables can be differentiated on basis of their absolution and relativity. If we write the amount in relative terms, i.e, in terms of another amount or commodoties or the thing we are talking in context with, then the variable is real, in the sense, they are not impacted by the price level.

Then according to the question:

1) For the first two options, values mentioned are in relative terms:

Option A gives relative (not actual) price of beignet in terms of price of paperback novels. Option B gives Lucia's relative wage in terms of paperback novels, i.e how many novels she can buy given her wage, her purchasing power for paperback novels. So, none of these two are values of nominal variables.

Option 3, on the other hand, is the absolute/exact wage value of Lucia, not in relative terms, thus it is a value of nominal variable.

2) Now, following the same reasoning as in part 1, clearly options A and B here are in absolute terms: price (not relative) of paperback novel=$7, absolute (again not relative) wage of Lucia=$14.

Option 3 however depicts relativity of Lucia's wage in terms of beignets, that is her purchasing power of beignets. So, this is the value of a real variable

3) Notice that after such increase in money supply, all values have risen by 2 times their old values respectively.

So, relative price of paper back novel = price of paperback novel/ price of beignets = 14/4 = 3.5 (Notice that it remains same as before: 7/2 = 3.5. Since such variable is free of change in it's relative value despite of change in actual values, it is the value of real variable, hence relativity matters)

Nominal value of Lucia's wage = $28 > $14. So value of nominal wage has risen.

Real value of Lucia's wage = wage/price level.

Now either it can be expressed in terms of other goods:

Real wage = 28/14 = 2 paperback novels

Real wage = 28/4 = 7 beignets

Or it can be expressed in terms of general price level. Price initially say was P, Wage was W(=14). Now the price has risen 2times in general and wage has also risen 2 times, (to 28=2*14=2*W) so new real wage = 2*W/2*P = W/P. So, real value of her wage is same.

Monetary neutrality is proposition that change in money supply changes nominal variables and does not change real variables.

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