Question

14. Which of the following statements about the velocity of money is correct? (a) The velocity of money increases if nominal GDP does not change but the nominal stock of money increases. (b) The velocity of money increases if the nominal price increases by 3%, the real GDP increases by 2% and the nominal stock of money increases by 4%. (c) The velocity of money decreases if the nominal price increases by 5%, the real GDP increases by 3% and the nominal stock of money decreases by 10%. (d) The velocity of money decreases if nominal GDP decreases by 5% and the nominal stock of money decreases by 5%.

Answer 1

According to quantity theory of money,

MV = PY

In growth terms,

% change in money supply + % change in velocity of money = % change in price + % change in real gdp

So, % change in velocity of money = % change in price + % change in real gdp - % change in money supply

% change in velocity of money = 3 + 2 - 4 = 1%

So, correct answer is B.