If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money:
A) Rises by 33 percent
B) Falls by 33 percent
C) Rises from 6 to 8
D) Falls from 8 to 6

Question

Quizplus · Accepted Answer

The income velocity of money is calculated as nominal GDP divided by the money supply. Initially, it is $4,800 billion / $600 billion = 8. After the money supply increases to $800 billion, it becomes $4,800 billion / $800 billion = 6. Thus, the velocity falls from 8 to 6.

If the Money Supply Rises from $600 Billion to $800