Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is
A) 1.33.
B) 2.
C) 3.
D) 12.

Question

Quizplus · Accepted Answer

The equation of exchange is:

MV = PQ

where

M = money supply
V = velocity of money
P = price level
Q = level of output (real GDP)

Plugging in the values given, we get:

4 trillion(V) = 2(price level)(6 trillion)

Simplifying, we get:

V = (2 x 6)/4 = 3

Therefore, the velocity of money is 3. The correct answer is C.

Using the Equation of Exchange, If the Money Supply Is