Question

The quantity of money is ​$5 ​trillion, real GDP is ​$10 ​trillion, the price level is 0.9​, the real interest rate is 3 percent a​ year, and the nominal interest rate is 7 percent a year. Calculate the velocity of​ circulation, the value of M​ × V​, and nominal GDP.

Answer 1

Answer:

(a) 2

(b) $10 trillion

(c) $0.4 trillion

Explanation:

Given that,

Quantity of money = ​$5 ​trillion

Real GDP = ​$10 ​trillion

Price level = 0.9​

Real interest rate = 3 percent

Nominal interest rate = 7 percent

Nominal interest rate = Real interest rate + Inflation rate

7% = 3% + Inflation rate

4% = Inflation rate

Velocity of​ circulation:

= GDP ÷ Total money supply

= ($10 × 1) ÷ $5

= 2

M × V = $5 ​trillion × 2

          = $10 trillion

Nominal GDP = Real GDP × Inflation

                       = ​$10 ​trillion × 4%

                       = $0.4 trillion