Consider the money demand function that takes the form (M/P)d = Y/4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?
A)i
B)4i
C)1/4i
D)0.25

Question

Quizplus · Accepted Answer

The velocity of money (V) is defined as the number of times a unit of currency is spent in a given period of time. It can be calculated as:

V = (PY)/M

Substituting the given money demand function, we get:

V = (PY)/(M/P)d
V = (PY)/(Y/4i)
V = 4i

Therefore, the average velocity of money in this economy is 4i, which is option B.

Consider the Money Demand Function That Takes the Form (M/P)d