Question 1

1. The level of prices and 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 $9.00. In year two, the price of the same basket is 8.00. From year one to year two, there is W at an annual rate of h A In year one, $72.00 will buy % baskets, and in year two, $72.00 will buy " baskets. This example illustrates that, as the price level falls, the value of money v . Continue without saving 3. The classical dichotomy and the neutrality of money The classical dichotomy is the separation of real and nominal vanables. The following questions test your understanding of this distinction. Taia divides all of her income between spending on digital movie rentals and lattes. In 2012, she earned an hourly wage of $28.00, the price of a digital movie rental was $7.00, and the price of a latte was $4.00. Which of the following give the real value of a vanable? Check all that apply. [l Taia's wage is $28.00 per hour in 2012. The price of a digital movie rental is 1.75 lattes in 2012. [l Taia's wage is 7 lattes per hour in 2012, Which of the following give the nominal value of a variable? Check all that apply. [l Taia's wage is 4 digital movie rentals per hour in 2012. [} The price of a latte is $4.00 in 2012. [J Taia's wage is $28.00 per hour in 2012. Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, 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 latte is $8.00. In 2017, the relative price of a digital movie rental is w . Between 2012 and 2017, the nominal value of Taia's wage w , and the real value of her wage b Monetary neutrality is the proposition that a change in the money supply w nominal variables and w real variables. M antinon wiithant cavinm 5. Using money creation to pay for government spending Consider Katmai, a hypothetical country that produces only salmon burgers. In 2020, a salmon burger is priced at $7.00. Complete the first row of the table with the quantity of salmon burgers that can be bought with 500. Hint: In this problem, assume it is not possible to buy a fraction of a salmon burger, and always round down to the nearest whole salmon burger. For example, if your calculations result in 1.5 salmon burgers, the answer should be 1 salmon burger. Price of a Salmon burger Salmon burgers Bought with $500 Year (Dollars) (Quantity) 2020 7.00 Suppose the government of Katmai cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 30% by 2021. Assuming monetary neutrality holds, complete the second row of the table with the new price of a salmon burger and the new guantity of salmon burgers that can be bought with $500 in 2021. The impact of the government's decision to raise revenue by printing money on the value of money is known as the v