If nominal GDP = $900 billion and the public holds $300 billion in M2, then the velocity of the M2 money supply is
A) 1.
B) 2.
C) 3.
D) 4.

Question

Quizplus · Accepted Answer

We use the equation of quantity theory of money to find the velocity of M2 money supply.

Nominal GDP = Price level x Real GDP
M3 = M1 + savings deposits, small time deposits, and retail money market funds
M2 = M1 + savings deposits and small time deposits

Now, we can use the equation of velocity of money:

Velocity = Nominal GDP / M2

Velocity = $900 billion / $300 billion = 3

If Nominal GDP = $900 Billion and the Public Holds