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. 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.
Hailey divides all of her income between spending on puzzle books and lattes. In 2012, she earned an hourly wage of $28.00, the price of a puzzle book was $7.00, and the price of a latte was $4.00.
Which of the following give the real value of a variable? Check all that apply.
Which of the following give the nominal value of a variable? Check all that apply.
Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, Hailey's wage has risen to $56.00 per hour. The price of a puzzle book is $14.00 and the price of a latte is $8.00.
In 2017, the relative price of a puzzle book is    .
Between 2012 and 2017, the nominal value of Hailey'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.

The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction.Hailey divides all of her income between spending on puzzle books and lattes. In 2012, she earned an hourly wage of $28.00, the price of a puzzle boo...

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Posted by Cleveland on September 10, 2024

Money supply, money demand, and adjustment to monetary equilibrium

The following table gives the quantity of money demanded at various price levels (P), the money demand schedule.
In the following table, fill in the column labeled Value of Money.
Price Level (P)Value of Money (1/P)Quantity of Money Demanded
(Billions of dollars)
1.00    2.0
1.33    2.5
2.00    4.0
4.00    8.0
Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the    money required to complete transactions, and the    money people will want to hold in the form of currency or demand deposits.
Assume that the Federal Reserve initially fixes the quantity of money supplied at $4 billion.
Use the orange line (square symbol) to plot the initial money supply (MS1) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.
According to your graph, the equilibrium value of money is    , therefore the equilibrium price level is    .
Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion.
In order to reduce the money supply, the Fed can use open market operations to    the public.
Use the purple line (diamond symbol) to plot the new money supply (MS2).
Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is     than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will    people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will    and the value of money will    .

The following table gives the quantity of money demanded at various price levels (PP), the money demand schedule.In the following table, fill in the column labeled Value of Money.Price Level (P)Value of Money (1/P)Quantity of Money Demanded(Billions of dollars)1.001.00   2.01.330.75  ...

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Posted by Cleveland on September 10, 2024
Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one energy drink, one egg sandwich, and one bike rental. In year one, the basket costs $15.00.
In year two, the price of the same basket is $14.00. From year one to year two, there is    at an annual rate of    .
In year one, $120.00 will buy    baskets, and in year two, $120.00 will buy    baskets.
This example illustrates that, as the price level falls, the value of money   

Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one energy drink, one egg sandwich, and one bike rental. In year one, the basket costs $15.00.In year two, the price of the same basket is $14.00. From year one to year two, there isdeflation  &nbs...

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Posted by Cleveland on September 10, 2024
Which of the following statements about inflation is not true?


c. Inflation reduces people's real purchasing power because it raises the cost of the things people buy....

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Posted by Cleveland on September 10, 2024
If the real interest rate is 2 percent, the inflation rate is 8 percent, and the tax rate is 20 percent, what is the after-tax real interest rate?

d. 0 percentNominal interest rate=Real interest rate+Inflation rateGiven:Real interest rate = 2%Inflation rate = 8%Nominal interest rate=2%+8%=10%\text{Nominal interest rate} = 2\% + 8\% = 10\%Calculate the after-tax nominal interest rate:After-tax nominal&nbs...

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Posted by Cleveland on September 10, 2024
Suppose that, because of inflation, people in Lebanon economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of _______.

e. shoeleather costs...

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Posted by Cleveland on September 10, 2024
Suppose that, because of inflation, a business in Venezuela must calculate, print, and mail a new price list to its customers each week. This is an example of _______.


d. menu costs...

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Posted by Cleveland on September 10, 2024
Which of the following costs of inflation does not occur when inflation is constant and predictable?

e. Arbitrary redistributions of wealth...

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Posted by Cleveland on September 10, 2024
If actual inflation turns out to be greater than people had expected, then _______.

a. wealth was redistributed to borrowers from lenders...

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Posted by Cleveland on September 10, 2024
If the nominal interest rate is 8 percent and the inflation rate is 4 percent, the real interest rate is _______.


a. 4 percent...

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Posted by Cleveland on September 10, 2024