Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 16: Problem 10

Suppose silver is used as the medium of exchange in the economy described in Example \(16.4 .\) Does this economy exhibit the classical dichotomy?

Short Answer

Expert verified
Answer: To determine if the given economy exhibits classical dichotomy, we need to examine whether real variables, such as real GDP, employment, and the production of goods and services, remain unaffected by changes in the silver money supply. If these real variables remain unchanged despite changes in the silver money supply, then the economy follows the classical dichotomy concept.

Step by step solution

01

Classical dichotomy refers to the idea that in an economy, the real variables can be separated from nominal variables. Real variables are those that relate to the quantities of goods and services in the economy, such as real GDP, employment, and real wages. Nominal variables are related to money in the economy and include money supply, nominal GDP, and nominal wages. Classical dichotomy suggests that changes in nominal variables will have no impact on real variables. #Step 2: Identify real and nominal variables in the given economy#

In this economy, silver is used as the medium of exchange. Some examples of real variables in this economy include real GDP, employment, and the production of goods and services. Nominal variables in this economy will include the silver money supply, silver prices of goods and services, and nominal wages paid in silver. #Step 3: Analyze the relationship between real and nominal variables#
02

According to the concept of classical dichotomy, an increase in the silver money supply will only affect nominal variables and will not have any impact on real variables. In other words, if the amount of silver in circulation increases, the prices of goods and services in silver, as well as nominal wages, will also increase, but the real GDP, employment, and the production of goods and services will remain unchanged. #Step 4: Determine whether the economy exhibits classical dichotomy or not#

If the economy follows the classical dichotomy principle, the real variables in the economy will remain unchanged despite changes in the amount of silver in circulation. To determine if this economy follows classical dichotomy, we need to examine whether the real variables such as real GDP, employment, and the production of goods and services remain unaffected by changes in the silver money supply. If these real variables remain unchanged, then this economy exhibits classical dichotomy. In conclusion, to determine whether the given economy with silver as the medium of exchange exhibits classical dichotomy, we need to examine the relationships between real and nominal variables. If real variables do not change due to changes in the silver money supply, then the economy follows the classical dichotomy concept.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Suppose an economy produces only two goods, \(X\) and \(Y\). Production of good \(X\) is given by where \(K_{x}\) and \(L_{x}\) are the inputs of capital and labor devoted to \(X\) production. The production function for good Fis given by \\[ =\sin ^{3} y^{-4} \lg ^{2} x^{2} \\] where \(K_{\text {; }}\) a.nd \(\mathrm{L}_{\text {, are the inputs of capital and labor devoted to } \mathrm{F} \text { production. The supply of }}\) capital is fixed at 100 units and the supply of labor is fixed at 200 units. Hence, if both units are fully employed, \\[ \begin{array}{l} K_{x}+K_{Y}=K_{T}=100 \\ L_{x}+L_{Y}=L_{T}=200 \end{array} \\] Using this information, complete the following questions. a Show how the capital-labor ratio in \(X\) production \(\left(K / L_{x}=k_{x}\right)\) must be related to the capital-labor ratio in \(\mathrm{F}\) production \(\left(K_{y} / L_{Y}=k_{y}\right)\) if production is to be efficient. b. Show that the capital-labor ratios for the two goods are constrained by \\[ a_{x} k_{x}+\left(l-a_{x}\right) k_{y}=\underline{K}_{T}-\underline{100}_{-} \\] where \(a_{x}\) is the share of total labor devoted to \(X\) production [that is, \(a_{x}=L, / L_{r}=L_{s} /\) \((L x+L y) J\) c. Use the information from parts (a) and (b) to compute the efficient capital-labor ratio for good Xfor any value of \(a_{x}\) between 0 and 1 d. Graph the Edgeworth production box for this economy and use the information from part (c) to develop a rough sketch of the production contract curve. e. Which good, \(X\) or \(Y\), is capital intensive in this economy? Explain why the production possibility curve for the economy is concave. \(f\) Calculate the mathematical form of the production possibility frontier for this economy (this calculation may be rather tedious!). Show that, as expected, this is a concave function.

Suppose the production possibility frontier for guns \((X)\) and butter \((Y)\) is given by \\[ X^{2}+2 \mathrm{F}^{2}=900 \\] a. Graph this frontier. b. If individuals always prefer consumption bundles in which \(Y=2 X\), how much Xand \(Y\) will be produced? c. At the point described in part (b), what will be the \(K P T\) and hence what price ratio will cause production to take place at that point? (This slope should be approximated by considering small changes in Xand \(Y\) around the optimal point. d. Show your solution on the figure from part (a).

Suppose the production possibility frontier for cheeseburgers (C) and milkshakes \((M)\) is given by \\[ C+2 M=600 \\] a. Graph this function. b. Assuming that people prefer to eat two cheeseburgers with every milkshake, how much of each product will be produced? Indicate this point on your graph. c. Given that this fast-food economy is operating efficiently, what price ratio \(\left(P / P_{M}\right)\) must prevail?

Suppose there are only three goods \(\left(\mathrm{X}, \mathrm{X}_{2}, \text { and } \mathrm{X}_{3}\right)\) in an economy and that the excess demand functions for \(X>\) and \(X_{3}\) are given by \\[ \begin{array}{l} E D_{2}=-\mathrm{SP}_{\mathrm{J}} / \mathrm{P},+2 P J P_{,}-1 \\ E D_{3}=4 P_{3} / P,-96 P J P_{x}-2 \end{array} \\] a. Show that these functions are homogeneous of degree zero in \(P_{x}, P_{2},\) and \(P_{s}\) b. Use Walras' law to show that if \(E D_{2}=E D_{3}=0, E D_{1}\) also must be 0. Can you also use Walras' law to calculate \(E D\\{?\) c. Solve this system of equations for the equilibrium relative prices \(P_{2} / P i\) and \(P J P\) ( What is the equilibrium value for \(P J P^{\wedge}\)

The purpose of this problem is to examine the relationship among returns to scale, factor intensity, and the shape of the production possibility frontier. Suppose there are fixed supplies of capital and labor to be allocated between the production of good \(X\) and good \(Y\). The production function for \(X\) is given by \\[ X=K^{\alpha} L^{\beta} \\] and for \(Y\) by \\[ Y=K^{\gamma} L^{s} \\] where the parameters \(\alpha, \beta, \gamma, \delta\) will take on different values throughout this problem. Using either intuition, a computer, or a formal mathematical approach, derive the production possibility frontier for \(X\) and \(Y\) in the following cases: a. \(\quad \alpha=\beta=\gamma=\delta=\frac{1}{2}\) b. \(\quad \alpha=\beta=\frac{1}{2}, \gamma=\frac{1}{3}, \delta=\frac{2}{3}\) \(c_{*} \quad \alpha=\beta=\frac{1}{2}, \gamma=\delta=\frac{2}{3}\) d. \(\alpha=\beta=\gamma=\delta=\frac{2}{3}\) e. \(\quad \alpha=\beta=.6, \gamma=.2, \delta=1.0\) f. \(\quad \alpha=\beta=.7, \gamma=.6, \delta=.8\) Do increasing returns to scale always lead to a convex production possibility frontier? Explain.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free