Suppose you hold $50 to buy groceries weekly and then the price of groceries increases by 5 percent. To be able to buy the same amount of groceries, what must happen to your nominal money holdings?
A) They must increase by $5.
B) They must increase by $2.50.
C) They can decrease by $5.
D) They must increase, but the amount of the increase is different than the above answers.

Question

Quizplus · Accepted Answer

If the price of groceries increases by 5 percent, then you would need $52.50 to buy the same amount of groceries as before ($50 / 0.95). Therefore, your nominal money holdings must increase by $2.50.

Suppose You Hold $50 to Buy Groceries Weekly and Then