Suppose nominal GDP is $2 trillion and the money supply is $0.5 trillion.According to the equation of exchange, what is the velocity of money?
A) $0.25 trillion
B) $1 trillion
C) $2.5 trillion
D) $4 trillion

Question

Suppose nominal GDP is $2 trillion and the money supply is $0.5 trillion.According to the equation of exchange, what is the velocity of money?  
A) $0.25 trillion 
B) $1 trillion 
C) $2.5 trillion 
D) $4 trillion

Quizplus · Accepted Answer

The velocity of money is calculated using the equation of exchange: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced (real GDP). In this case, nominal GDP (PQ) is $2 trillion and the money supply (M) is $0.5 trillion. To find the velocity of money (V), we rearrange the equation to V = PQ / M = $2 trillion / $0.5 trillion = 4. Thus, the velocity of money is 4, or $4 trillion.

Suppose Nominal GDP Is $2 Trillion and the Money Supply