Consider nominal GDP is 1500 and the money supply is 400.
Instructions: Enter numerical values to two decimal places.
a) What is the velocity? V =
b) If nominal GDP rises to 1600, but the money supply does not change, how has velocity changed? Velocity will (increase/decrease) by to V =
c) If GDP now falls back to 1500 and the money supply falls to 350, what is velocity? V =
Answer
a)
the equation of exchange in the market is:
MV=PY
M=money supply
V=velocity
PY=nominal GDP
V=PY/V
V=1500/400=3.75
the velocity is 3.75
==========
b)
V=1600/400
=4
the velocity increases by =4-3.75=0.25
=========
c)
V=1500/350
=4.28571429
=4.29
the velocity is 4.29
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