Figure 17-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes.
-Refer to Figure 17-2. Suppose the relevant money-demand curve is the one labeled MD₁; also suppose the economy's real GDP is 30,000 for the year. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service?

Question

Figure 17-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes.

-Refer to Figure 17-2. Suppose the relevant money-demand curve is the one labeled MD₁; also suppose the economy's real GDP is 30,000 for the year. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service?

Quizplus · Accepted Answer

To find the velocity of money, we need to divide the nominal GDP (which equals the money supply times the price level) by the money supply.
Nominal GDP = P x Y where P is the price level and Y is real GDP.
Using the graph, we can see that the equilibrium money supply is at $120 billion and the equilibrium price level is at 1.2. So nominal GDP is $144 billion (=$120 billion x 1.2).
Velocity of money = nominal GDP / money supply = $144 billion / $120 billion = 1.2
This means that the typical dollar bill is used 1.2 times per year to pay for a newly produced good or service.
To find the number of times per year, we need to take the reciprocal of the velocity: 1 / 1.2 = 0.833
Rounding up, the answer is 12, so the typical dollar bill is used 12 times per year to pay for a newly produced good or service. Therefore, the answer is D.