Assume that M is $200 billion and V is 6. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by
A) $140 billion.
B) $180 billion.
C) $220 billion.
D) $260 billion.

Question

Quizplus · Accepted Answer

The monetarist equation is MV = PY, where M is the money supply, V is the velocity of money, and PY is nominal GDP. Initially, MV = 200 billion * 6 = $1,200 billion. If V increases by 15%, V becomes 6 * 1.15 = 6.9. The new nominal GDP is 200 billion * 6.9 = $1,380 billion. The increase in nominal GDP is $1,380 billion - $1,200 billion = $180 billion.

Assume That M Is $200 Billion and V Is 6