Suppose money supply (M) = $3,960 billion, price level (P) = 1.1, and real GDP (Y) = $7,200 billion. Calculate the value of velocity using the equation of exchange.

Question

Quizplus · Accepted Answer

The equation of exchange is MV = PY, where:
M = Money supply = $3,960 billion
V = velocity = ?
P = Price level = 1.1
Y = Real GDP = $7,200 billion

Rearranging the formula, we get:
V = PY/M
Plugging in the values, we get:
V = ($7,200 billion x 1.1) / $3,960 billion
V = 1.98
Rounding off to one decimal place, we get V = 2.0. Therefore, the answer is choice C, 2.0.

Suppose Money Supply (M) = $3,960 Billion, Price Level (P)