3. The classical dichotomy and the neutrality of money

The classical dichotomyis the separation of real and nominal variables. The following questions test your understanding of this distinction.

Taia divides all of her income between spending on digital movie rentals and Americanos. In 2017, she earned an hourly wage of $28.00, the price of a digital movie rental was $7.00, and the price of a Americano was $4.00.

Which of the following give the realvalue of a variable?Check all that apply.

The price of a digital movie rental is $7.00 in 2017.

The price of a digital movie rental is 1.75 Americanos in 2017.

Taia's wage is 7 Americanos per hour in 2017.

Which of the following give the nominalvalue of a variable?Check all that apply.

The price of a Americano is 0.57 digital movie rentals in 2017.

The price of a Americano is $4.00 in 2017.

Taia's wage is $28.00 per hour in 2017.

Suppose that the Fed sharply increases the money supply between 2017 and 2022. In 2022, Taia's wage has risen to $56.00 per hour. The price of a digital movie rental is $14.00 and the price of a Americano is $8.00.

In 2022, the relative price of a digital movie rental is v . Between 2017 and 2022, the nominal value of Taia's wage w , and the real value of her wage h A Monetary neutrality is the proposition that a change in the money supply W nominal variables and W real variables. 4. Velocity and the quantity equation Consider a simple economy that produces only jean jackets. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2021, the money supply was 5400, the price of a jean jacket was $12.50, and the economy produced 800 jean jackets. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Quantity of Money Price Level Quantity of Output Nominal GDP Year (Dollars) Velocity of Money (Dollars) (Jean jackets) (Dollars) 2021 400 D 12.50 800 v 2022 408 235 v 800 hd The money supply grew at a rate of W from 2021 to 2022. Since jean jacket output did not change from 2021 to 2022 and the velocity of money w , the change in the money supply was reflected W in changes in the price level. The inflation rate from 2021 to 2022 was v o