1. According to classical macroe conomic theory, money supply shocks are "neutral."

a.

Explain what this means.

Hint: see 5.7 of the textbook.

b.

Based on that theory, how would a 5% increase in a nation's money supply affect its real

wage rate (W/P), all else equal (up, down,

or no change, and by how much)?

c.

According to the quantity theory of money, how would a 5% increase in the money supply

affect the price of goods and services (P), all else equal (up, down, or no change, and by

how much)?

d.

To be consistent with both theories, what would have to happen to the nominal wage rate

(W)? Explain.