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Scenario: The Velocity Equation
Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate price level equals 2.
-(Scenario: The Velocity Equation) Look at the scenario The Velocity Equation. If the velocity of money is 2, the money supply is:
A)$20 trillion.
B)$10 trillion.
C)$5 trillion.
D)$40 trillion.

Question

Quizplus · Accepted Answer

The velocity equation is MV=PQ, where M is the money supply, V is the velocity of money, P is the aggregate price level, and Q is real GDP. Rearranging the equation to solve for M, we get M = PQ/V. Substituting the given values, we get M = (2 x $10 trillion)/2 = $10 trillion. Therefore, the money supply is $10 trillion.

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