Question

Assume that M is $200 billion and V is 6. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by:
A. $140 billion
B. $180 billion
C. $220 billion
D. $260 billion

Answer 1

Answer:

Value of nominal GDP ; PY = $ 1380 ans.

Explanation:

Monetarism is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and the price level. The "Founding Father" of Monetarism is economist Milton Friedman. He said that Inflation is always and everywhere a monetary phenomenon.

We begin with the equation of exchange. This is the building block for monetarist theory. It says that

M × V = P × Y

where M is the quantity of M1

V is velocity of M1, or the average number of times that the dollar turns over in a given year on the purchase of final goods and services

P is the price level, and Y is real output.

Now changes in M V will change the nominal GDP ; P Y

Initially, we have M V as 200 ( 6) =$1200

Now , we have M = $200 and V = 6 + 15% ( 6 )

V = 6 + 0.9 ; V = 6.9

MV = PY

MV = 200 ( 6.9 ) ; MV = $1380

Hence, value of nominal GDP ; PY = $ 1380 ans.