Asked by shawn christian on May 11, 2024
Verified
If the money supply in an economy equals $1,000 and nominal GDP equals $3,000,then according to the equation of exchange,velocity of money:
A) equals 1/3.
B) equals 3.
C) equals 3 million.
D) cannot be determined since we do not know anything about prices.
E) cannot be determined since we do not know anything about real GDP.
Nominal GDP
A measure of a country's economic output based on current prices, without adjusting for inflation.
Equation of Exchange
The equation of exchange is an economic formula relating the supply of money in an economy to the velocity of money, price level, and an index of expenditures.
Velocity of Money
The rate at which money circulates in the economy, calculated as the ratio of nominal GDP to the money supply.
- Acquire knowledge on the equation of exchange and its impact on money velocity.
Verified Answer
SV
Surjit VictorMay 15, 2024
Final Answer :
B
Explanation :
According to the equation of exchange, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP. We are given that M = $1,000 and nominal GDP (PQ) = $3,000, so we can solve for V as V = PQ/M = $3,000/$1,000 = 3. Therefore, the velocity of money equals 3.
Learning Objectives
- Acquire knowledge on the equation of exchange and its impact on money velocity.