Chapter 11 Monetary Neutrality Example

Chapter 11 Monetary Neutrality Example - Now assume the...

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Monetary Neutrality Example  o Nominal variables are those variables measured in dollars o Real variables are those measured in physical units or relative prices o A change in the money supply affects the value of nominal variables because the  price level is determined by the equilibrium of the supply and demand for money o Real variables, such as goods and services or real wages, are not affected by  changes in the money supply o For instance, assume that you earn $7 per hour and a large pizza costs $14 o
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Unformatted text preview: Now assume the Bank of Canada increases the money supply so that all price, including the price of labour double o Your wage is $14 per hour, but a large pizza costs $28 o In real terms, nothing has changed o You still must work two hours to afford a large pizza o This illustrates the concept of monetary neutrality o Changes in the money supply affect nominal variables, such as you wage rate measured in dollars, but not real variables, such as the purchasing power of your wage...
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