Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, Valerie's wage has risen to $30.00 per hour. The price of a magazine is $10.00 and the price of a donut is $6.00. In 2017, the relative price of a magazine is 1.67 donuts. Between 2012 and 2017, the nominal value of Valerie's wage increases, and the real value of her wage remains the same. Monetary neutrality is the proposition that a change in the money supply affects nominal variables anddoes not affect real variables. True / False.

Question

Eileen Hancock

Business

8 October, 18:52

Suppose that the Fed sharply increases the money supply between 2012 and 2017. In 2017, Valerie's wage has risen to $30.00 per hour. The price of a magazine is $10.00 and the price of a donut is $6.00. In 2017, the relative price of a magazine is 1.67 donuts. Between 2012 and 2017, the nominal value of Valerie's wage increases, and the real value of her wage remains the same. Monetary neutrality is the proposition that a change in the money supply affects nominal variables anddoes not affect real variables. True / False.

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Nora Erickson · Answer 1

True

Explanation:

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Monetary neutrality is an idea that a only nominal variables in the economy such as prices, wages, and exchange rates are affected by changes in the stock of money, but has no effect on real variables, like employment, real GDP, and real consumption.

From the question, there is an increment in the nominal value of Valerie's wages but this increase does not reflect on her consumption because the real value of her money; which is the amount of goods and services she can buy stays the same despite the increase.