wage is in dollars,then the real wage is W/PF.where PF is the dollar price of farm goods. c.If the marginal productivity of barbers is unchanged,then their real wage is unchanged. d.The al wage in(c)is measured in terms of haircuts.That is,if the no minal wag is in dollars,then the real wage is W/PH,where PH is the dollar price of a haireut e.If workers can move freely between being farmers and being barbers,then they must be paid the same wage W in each sector. f.If the nominal wage W is the same in both sectors,but the real wage in terms of farm goods is greater than the real wage in terms of hairc cuts,then the price of haircuts must have risen relative t o the price of farm goods g.Both groups benefit from technological progress in farming C HA PT E R 4 Money and Inflation Ouestions for Keview 1.Describe the functions of money. power from the present to the future.As a unit of account,money provides the terms in which prices are quoted and debts are recorded.As a medium of exchange,money is what we use to buy goods and services. 2.What is fiat money?What is commodity money? 2.Fiat money is established as money by the government but has no intrinsic value.For example,a U.S.dollar bill is fiat money.Commodity money is money that is based on a commodity with some intrinsic value.Gold,when used as oney.is an nodity money 3.Who controls the money supply and how? 3.In many countries,a central bank controls the money supply.In the United States,the central bank is the Federal Reserve-often called the Fed.The control of the ney si upply is called etary policy.The that the fed controls the money supply is through open-market operations,which involve the purchase or sale of government bonds.To increase the money supply,the Fed uses dollars to buy government bonds from the public,putting more dollars into the hands of the public.To decrease the money su pply,the Fed sells some of its government bonds,taking dollars out of the hands of the public.marginal product of farmers causes their real wage to rise. b.The real wage in(a)is measured in terms of farm goods.That is,if the nominal wage is in dollars,then the real wage is W/PF, where PF is the dollar price of farm goods. c.If the marginal productivity of barbers is unchanged,then their real wage is unchanged. d.The real wage in(c)is measured in terms of haircuts.That is,if the nominal wage is in dollars,then the real wage is W/PH,where PH is the dollar price of a haircut. e.If workers can move freely between being farmers and being barbers,then they must be paid the same wage W in each sector. f.If the nominal wage W is the same in both sectors,but the real wage in terms of farm goods is greater than the real wage in terms of haircuts,then the price of haircuts must have risen relative to the price of farm goods. g.Both groups benefit from technological progress in farming. C H A P T E R 4 Money and Inflation Questions for Review 1.Describe the functions of money. 1. Money has three functions:it is a store of value,a unit of account,and a medium of exchange. As a store of value,money provides a way to transfer purchasing power from the present to the future.As a unit of account,money provides the terms in which prices are quoted and debts are recorded.As a medium of exchange,money is what we use to buy goods and services. 2.What is fiat money?What is commodity money? 2. Fiat money is established as money by the government but has no intrinsic value. For example,a U.S.dollar bill is fiat money.Commodity money is money that is based on a commodity with some intrinsic value.Gold,when used as money,is an example of commodity money. 3.Who controls the money supply and how? 3. In many countries,a central bank controls the money supply. In the United States, the central bank is the Federal Reserve—often called the Fed.The control of the money supply is called monetary policy. The primary way that the Fed controls the money supply is through open-market operations,which involve the purchase or sale of government bonds. To increase the money supply,the Fed uses dollars to buy government bonds from the public,putting more dollars into the hands of the public.To decrease the money supply,the Fed sells some of its government bonds,taking dollars out of the hands of the public