Over the past year, Macroland's economy experienced several changes. Money supply grew by 2.5%, velocity grew by 0.5%, real GDP grew by 2%, and employment grew by 1%. According to the equation of exchange, what growth rate in nominal GDP would be expected in Macroland for this time period?
A) 0%
B) 1.5%
C) 1%
D) 3%

Question

Quizplus · Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP. The growth rate in nominal GDP (PQ) can be found by adding the growth rates of M and V (since these are percentage changes, they can be added directly) and then subtracting the growth rate of Q (real GDP). So, the expected growth rate in nominal GDP is 2.5% (growth in M) + 0.5% (growth in V) - 2% (growth in Q) = 3%.

Over the Past Year, Macroland's Economy Experienced Several Changes