Consider a simple economy that produces only chocolates. The economy produces 100 bars of chocolates in a year, and a chocolate bar costs $5. If the quantity of money supplied in the economy is $25, then the velocity of money is:
A) 2.5
B) 10
C) 20
D) 1000

Question

Consider a simple economy that produces only chocolates. The economy produces 100 bars of chocolates in a year, and a chocolate bar costs $5. If the quantity of money supplied in the economy is $25, then the velocity of money is: 
A) 2.5
B) 10
C) 20
D) 1000

Quizplus · Accepted Answer

The velocity of money is calculated by dividing nominal GDP (which is the sum of all goods and services produced in an economy) by the money supply. In this case, nominal GDP is $500 (100 bars of chocolates produced x $5 per bar). Dividing $500 by the money supply of $25 gives us a velocity of 20. Therefore, the answer is C.

Consider a Simple Economy That Produces Only Chocolates