Velocity in the country of Nanoland is always stable. In 2018, the money supply was $200 billion and the GDP price deflator was four times as high as it was in the base year. In 2019, the money supply increased to $240 billion, the price level increased by 15 percent, and nominal GDP equalled $1200 billion. By how much did real GDP increase between 2018 and 2019?
A) 0.45 percent
B) 4.35 percent
C) 7.45 percent
D) 20 percent

Question

Quizplus · Accepted Answer

Real GDP in 2018 can be calculated using the formula for velocity (V = (P*Y)/M), where P is the price level (GDP deflator), Y is real GDP, and M is the money supply. Given that velocity is stable, we can set the equation for 2018 equal to 2019 to solve for the change in real GDP. The 15% increase in the price level in 2019 implies the new deflator is 4.6 times the base year (since it was 4 times in 2018 and increased by 15%). Using the given nominal GDP for 2019 and the new money supply, we can solve for real GDP in both years and find the percentage increase, which is approximately 4.35%.

Velocity in the Country of Nanoland Is Always Stable