Question

Consider nominal GDP is 1500 and the money supply is 400. Instructions: Enter numerical values to two decimal places. a) What is the velocity? V = 3.75 b) If nominal GDP rises to 1600, but the money supply does not change, how has velocity changed? Velocity will (increase/decrease) increases by 4-3.75 to V = 0.25 c) If GDP now falls back to 1500 and the money supply falls to 350, what is velocity? V = 4.29

Answer 1

Answer:

a. V=3.75

b. Velocity increases by 0.25

c. Velocity is 4.29

Explanation:

a)  the equation of exchange in the market is:

MV=PY

M=money supply

V=velocity

PY=nominal GDP

V=PY/V

V=1500/400=3.75

the velocity is 3.75

b)

V=1600/400

=4

the velocity increases by =4-3.75=0.25

c)

V=1500/350

=4.28571429

=4.29

the velocity is 4.29