Question

Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate price level equals 2.If the velocity of money is 2, the money supply is:

Answer 1

Answer:

$10 trillion

Explanation:

The quantitative theory of money (QTM) states that MV=PT, but we can say that the value of transactions (T) is equal to the GDP (Y). So, MV=PY

M=Money Supply

V=Velocity of money

P= Price level

Y= Real GDP

We use this formula to find M (We use $10 trillion because it is the real GDP, the nominal is not accurate because it has immerse price level changes which overvalues GDP)

M=PY/V

M=2*$10 trillion/2

M=$ 10 trillion