ch30_ak - Econ 2 Principles of Economics Chapter 30...

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1 Econ 2: Principles of Economics Chapter 30 Questions for Review 2. According to the quantity theory of money, an increase in the quantity of money causes a proportional increase in the price level. 3. Nominal variables are those measured in monetary units, while real variables are those measured in physical units. Examples of nominal variables include the prices of goods, wages, and nominal GDP. Examples of real variables include relative prices (the price of one good in terms of another), real wages, and real GDP. According to the principle of monetary neutrality, only nominal variables are affected by changes in the quantity of money. Problems and Applications 2. a. If people need to hold less cash, the demand for money shifts to the left, because there will be less money demanded at any price level. b. If the Fed does not respond to this event, the shift to the left of the demand for money combined with no change in the supply of money leads to a decline in
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