Question

1. 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. Yvette spends all of her money on paperback novels and beignets. In 2014, she earned $27.00 per hour, the price of a paperback novel was $9.00, and the price of a beignet was $3.00.

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

-The price of a beignet is $3.00 in 2011.

-Maria's wage is $27.00 per hour in 2011.

-The price of a beignet is 0.33 paperback novels in 2011.

Answer 1

These two options represent nominal values:

-The price of a beignet is $3.00 in 2011.

-Maria's wage is $27.00 per hour in 2011.

They are expressed in monetary value without taking into account inflation, or without being represented in terms of something else.

This option represents real value:

-The price of a beignet is 0.33 paperback novels in 2011.

The price of a beignet, nominally $3.00 is being expressed in relation to the price of something else: paperback novels, whose nominal price is $9.00.

In other words, in real terms, a beignet costs a third of what a paperback novel costs.