Question

Suppose the nominal GDP is $25 million, the price level is 1.25, and the central bank has set the money supply at $10 million. What is the real GDP and the velocity of money according to the quantity theory of money

Answer 1

Answer:

Real GDP: $20 million

Velocity of the money: $2.5

Explanation:

We have the formula to calculate:

    - Price level = Nominal GDP/  Real GDP

      => Real GDP = Nominal GDP/ Price level  = $25/ 1.25 = $20 million

    - Velocity of the money x Money supply = Price level x Real GDP

      => Velocity of the money = Price level x Real GDP / Money supply

                                                 = 1.25 x 20/ 10 = $2.5

Conclusion:

According to the quantity theory of money, Real GDP is $20 million, and velocity of the money is $2.5

Answer 2

Answer:

a) real GDP =$20,000,000

b)velocity of money is 2.50

Explanation:

Nominal GDP is normal spending carried out in terms of dollars.

Nominal GDP is the product of real GDP and price level

Nominal GDP= real GDP*Price level

Given the nominal GDP=$25 million and the price level =1.25 then,

$25000000=real GDP *1.25

$25000000/1.25 = real GDP

$20000000= real GDP

Apply the quantity equation in economics which is;

money supply*velocity of money =price level * real GDP

Given the money supply is=$10,000,000 then,

velocity of money = (price level*real GDP)/money supply

velocity of money = (1.25*20,000,000)/10,000,000

velocity of money =2.50