Asked by Jamie Wilson on May 01, 2024
Verified
According to the equation of exchange,if nominal GDP equals $6 trillion and the money supply equals $1 trillion,the velocity of money:
A) must be 6.
B) must be 1/6.
C) must be 6 trillion.
D) must be 1/6 trillion.
E) cannot be determined unless we know the price level.
Equation of Exchange
The equation of exchange is a macroeconomic formula that relates the money supply, its velocity, the price level, and an index of expenditures in an economy, typically expressed as MV = PQ.
Nominal GDP
The gross domestic product measured in current prices, without adjusting for inflation, reflecting the value of all goods and services produced.
Money Supply
The total amount of monetary assets available in an economy at a specific time, including currency, demand deposits, and other liquid instruments.
- Learn about the equation of exchange and its role in determining the velocity of money.
Verified Answer
ZK
Zybrea KnightMay 02, 2024
Final Answer :
A
Explanation :
According to the equation of exchange, MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the real GDP. Solving for V, we get V = PY/M. Given that nominal GDP (PY) equals $6 trillion and the money supply (M) equals $1 trillion, the velocity of money (V) must be 6.
Learning Objectives
- Learn about the equation of exchange and its role in determining the velocity of money.