Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 21-2. Assume the money market is always in equilibrium, and suppose r₁ = 0.08; r₂ = 0.12; Y₁ = 13,000; Y₂ = 10,000; P₁ = 1.0; and P₂ = 1.2. Which of the following statements is correct? A)When r = r₂, nominal output is higher than it is when r = r₁. B)When r = r₂, real output is higher than it is when r = r₁. C)When r = r₂, the expected rate of inflation is higher than it is when r = r₁. D)If the velocity of money is 4 when r = r₂, then the quantity of money is $3,000.

Question

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The velocity of money (V) is calculated as V = (P * Y) / M. Given V = 4, P = 1.2, and Y = 10,000 when r = r₂, the quantity of money (M) is $3,000.