Question

7. Which of the following statements about the velocity of money is correct? (a) The velocity of money does not change if nominal GDP increases but the nominal stock of money stays the same. (b) The velocity of money decreases if the nominal price increases by 2%, the real GDP increases by 2% and the nominal stock of money increases by 3%. (c) The velocity of money decreases if the nominal price increases by 2%, the real GDP increases by 1% and the nominal stock of money increases by 3%. (d) The velocity of money decreases if nominal GDP increases by 10% and the nom- inal stock of money increases by 12%.

Answer 1

According to QUANTITY theory of Money,

Velocity of money=Nominal GDP/nominal Mone stock=real gdp* nominal price level/nominal stock of money

Increase in nominal GDP by 10% will increase velocity of Money by 10% and increase in nominal money supply by12% will decrease money supply 12%

So aggregate change in velocity of money=10-12=-2%

So velocity of money will decrease approximately 2%

So OPTION D is correct