-Refer to the graph above to answer this question.Suppose that the economy is in equilibrium and each dollar held for transactions purposes is spent on average four times per year,what can we infer from this?

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Quizplus · Accepted Answer

The velocity of money formula is $V = \frac{PQ}{M}$, where $V$ is the velocity of money, $PQ$ is the nominal GDP, and $M$ is the money supply. Given that each dollar is spent on average four times per year ($V = 4$) and assuming the economy is in equilibrium, if the money supply is spent four times per year, then the nominal GDP is four times the money supply. Without the exact money supply given, we can infer that if the money supply were $200, for example, the nominal GDP would be $800 ($4 \times 200$). The correct inference about nominal GDP or the money supply cannot be made precisely without one of the values, but the relationship between the velocity of money, the money supply, and nominal GDP allows us to understand how changes in one can affect the others.

-Refer to the Graph Above to Answer This Question