If people wished to hold a quantity of money equal to 80% of nominal GDP, the velocity of money would be
A) 1.00.
B) 1.25.
C) 1.50.
D) 1.75.

Question

Quizplus · Accepted Answer

The equation of exchange is: MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP.

If people wished to hold a quantity of money equal to 80% of nominal GDP, then the demand for money (M/P) would be 0.8Y.

At equilibrium, MV = PY, so V = PY/M.

Substituting the demand for money into the equation yields: V = (1/P)(0.8Y/Y) = 0.8/P.

Assuming P = 1, V = 0.8, which means that the velocity of money would be 1/0.8 = 1.25.

If People Wished to Hold a Quantity of Money Equal