Figure 16-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 16-2. Assume the money market is always in equilibrium, and suppose r₁ = 0.08; r₂ = 0.12; Y₁ = 13,000; Y₂ = 10,000; P₁ = 1.0; and P₂ = 1.2. Which of the following statements is correct? A) When r = r₂, nominal output is higher than it is when r = r₁. B) When r = r₂, real output is higher than it is when r = r₁. C) When r = r₂, the expected rate of inflation is higher than it is when r = r₁. D) If the velocity of money is 4 when r = r₂, then the quantity of money is $3,000.

Question

Quizplus · Accepted Answer

The velocity of money (V) is calculated as V = (P * Y) / M. Given V = 4, P = 1.2, and Y = 10,000 when r = r2, solving for M gives M = (1.2 * 10,000) / 4 = $3,000.