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Homework answers / question archive / 1 Question 9 Not yet In 2001, Pablo earned $400 per week at his job
1 Question 9 Not yet In 2001, Pablo earned $400 per week at his job. In 2018, Pablo earned $680 per week. If the CPI in 2001 was 100 and the CPlin 2018 was 152, then answered Marked out of 0.50 Select one: P Flag question a. the 2018 wage measured in 2001 dollars is $315.79 b. the 2001 wage measured in 2018 dollars is $315.79 C. Pablo was better off in 2018 in real terms. d. the 2018 wage measured in 2001 dollars is $608. e. the 2001 wage measured in 2018 dollars is $608.
2
Give a careful explanation of what money illusion is, and why seignorage only holds if there is money illusion.
1 In 2001: Wage= $400 and CPI=100
In 2018: Wage= $600 and CPI=152
As there is an increase in CPI which implies that there is inflation in the economy.
The 2018 wage measured in 2001 dollar= [Wage(2018) x CPI(2001)] / CPI(2018)= (600 x 100)/152= $394.73
The 2001 wage measured in 2018 dollar= [Wage(2001) x CPI(2018)] / CPI(2001)= (400 x 152)/100= $608
Option e is the correct answer
2
Money illusion refers to the mistaken idea that money has a fixed value and represents the actual purchasing power of goods and services. Since the value of money can be eroded by inflation, the value of money is not constant and looking at the monetary value of things can be misguided.
Seignorage refers to the printing of money by the government in order to revive the economy and make profits. It gives an illusion that a lot is being produced and consumed in the economy, when in reality only the monetary value of goods and services is increasing, while the real value is getting eroded by price rise. This leads to an illusion of money.
