Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 17, Problem 1CQQ
To determine
Nominal and real variables and money neutrality.
Expert Solution & Answer
Answer to Problem 1CQQ
Option ‘d’ is the correct answer.
Explanation of Solution
Option (d):
According to the principle of monetary neutrality, only nominal variables are affected by changes in the money supply. Also, monetary neutrality approximately describes the behavior of the economy in the long run. Thus, option ‘d’ is correct.
Option (a):
By the principle of monetary neutrality, nominal variables are affected by changes in the money supply. Also, monetary neutrality approximately describes the behavior of the economy in the long run. Thus, option ‘a’ is incorrect.
Option (b):
By the principle of monetary neutrality, nominal variables are affected by changes in the money supply. Thus, option ‘b’ is incorrect.
Option (c):
Monetary neutrality approximately describes the behavior of the economy in the long run. Thus, option ‘c’ is incorrect.
Economics Concept Introduction
Concept introduction:
Nominal variables: Nominal variable refers to those variables that are measured in monetary units.
Real variables: Real variables refer to those variables that are measured in physical units.
Monetary neutrality: Money neutrality refers to the changes in the money supply that do not affect real variables.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
schedule03:32
Students have asked these similar questions
The classical principle of monetary neutrality statesthat changes in the money supply do not influence_________ variables, and it is thought mostapplicable in the _________ run.a. nominal; shortb. nominal; longc. real; shortd. real; long
Money neutrality is the idea that
a. any policy can have intended and unintended consequences
b. in the long-run, markets will clear and return the economy to equilibrium regardless of what happens to the money supply.
c. there are two types of variables, nominal and real, and only nominal variables are affected by the money supply.
d. nominal and real interest rates are unrelated.
During the middle of the 20th century, income inequality in developed economies generally fell. The reason for this was
a. average incomes didn't rise but welfare systems redistributed income.
b. that returns to assets held by high income earners fell steadily.
c. incomes overall rose but taxation systems were slowly made more and more progressive.
d. a rise in average income with incomes of the bottom deciles rising faster than the top.
The short-run impact on the nominal interest rate of monetary expansion is different from its long-run impact. Which of the following explanations is not correct?a. In the short run, nominal interest rate falls due to Fisher effect.b. Over time, rising income pushes up nominal interest rate via increased demand for money.c. Over time, expected inflation rate rises, which in turn pushes up nominal interest rate.d. Over time, rising prices also push up nominal interest rate.e. All of the above are correct
Chapter 17 Solutions
Principles of Macroeconomics (MindTap Course List)
Knowledge Booster
Similar questions
- The speculative demand for money is... A. positively related to interest rates. B. inversely related to interest rates. C. directly related to income. D. an active balance (earns interest).arrow_forwardIf nominal GDP in an economy is $1500 and the money supply is $500, what is the velocity of money? a. 333 b. 5 c. 3 d. 7500arrow_forward1.Monetary equilibrium occurs when theQuestion options: A) supply and demand for all goods in the economy are equal at the current rate of interest. B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest. C) growth in the money supply is zero. D) the money supply is growing at a constant rate. E) nominal rate of interest equals the real rate of interest. 2.The economy starts in long-run equilibrium. After an initial shock, and the subsequent adjustment process, the economy ends up at a point with a higher price level and the initial level of real GDP. Which of the following initial shocks would explain this?Question options: a) An increase in desired savings. b) An increase in government transfer payments. c) An appreciation of the Canadian dollar. d) An improvement in production technology. e) An increase in the cost of factor inputs. 3.The economy starts in long-run equilibrium. After an initial shock, and the subsequent…arrow_forward
- Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then A. the nominal interest rate rises, but the real interest rate does not. B. the real interest rate rises, but the nominal interest rate does not. C. neither the nominal nor the real interest rate rise. D. both the nominal and the real interest rate rise.arrow_forward3. 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. Ginny spends all of her money on magazines and donuts. In 2015, she earned $14.00 per hour, the price of a magazine was $7.00, and the price of a donut was $2.00. Which of the following give the nominal value of a variable? Check all that apply. The price of a donut is 0.29 magazines in 2015. O Ginny's wage is 2 magazines per hour in 2015. O The price of a donut is $2.00 in 2015. Which of the following give the real value of a variable? Check all that apply. The price of a magazine is $7.00 in 2015. O Ginny's wage is $14.00 per hour in 2015. O The price of a magazine is 3.5 donuts in 2015. Suppose that the Fed sharply increases the money supply between 2015 and 2020. In 2020, Ginny's wage has risen to $28.00 per hour. The price of a magazine is $14.00 and the price of a donut is $4.00. In…arrow_forwardSuppose a country has a money demand function (M/P)ª = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What is its relationship to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.arrow_forward
- A. Discuss, with the help of diagrams, Friedman’s argument concerning the short and long-run effects of an increase in the money supply. B. Now discuss how his argument can be extended to study short and long-run effects of changes in the growth rate of a growing money supply. Both parts please.arrow_forwardAccording to the classical theory of money, inflation does not make workers poorer because wages increase: Select one: a. faster than the overall price level. b. more slowly than the overall price level. c. in proportion to the increase in the overall price level. d. in real terms during periods of inflation.arrow_forwarda) In the long run, the real interest rate is determined by and, in the short run, the Reserve Bank can control the real interest rate by setting the nominal interest rate if inflation adjusts A. saving and investment; slowly B. saving and investment; quickly C. the Reserve Bank; to equal the increase in the money supply D. the Reserve Bank; slowly b) Small differences in growth rates of real GDP per person over the long run make differences in the average standard of living. A. almost no B. unpredictable C. very large D. very minorarrow_forward
- Japan's money supply is growing rapidly at a 5.54% while real GDP is increasing at 8.29%. Japan's real interest rate is also growing at 4.46%. *we are assuming Quantity Theory of Money, Classical Dihotomy, and Fisher Effect effect are true. a. calculate the inflation rate b. calculate nominal interest rate c. calculate GDP growth ratearrow_forwardAll else equal, suppose the interest rate rise from 3% to 3.5%. What will happen in the supply of money? a. Shifts to the right. b. Shifts to the left. c. An upward movement along the supply curve. d. An downward movement along the supply curve. e. The supply will remain unchanged.arrow_forwardMilton Friedman argued that the Fed's control over the money supply could be used to peg a. the level of a nominal or real variable, but not the growth rate of a real or nominal variable. b. the level or growth rate of a real variable, but not the level or growth rate of a nominal variable. c. the level or growth rate of a nominal variable, but not the level or growth rate of a real variable. d. both levels and growth rates of both real and nominal variables.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning