91Ó°ÊÓ

The monetarists have given the following equation of exchange:

$$\begin{gathered} \mathrm{Money}\mathrm{Supply}×\mathrm{Velocity}=\mathrm{Nominal}\mathrm{GDP} \\ 96×\mathrm{Velocity}=336 \\ \mathrm{Velocity}=\frac{336}{96}=3.5 \end{gathered}$$

So, the velocity of the money is 3.5.

When the central bank reduces the money supply, the equilibrium output in the economy shrinks. The interest rate will increase due to the money supply so that the investment will become costlier, and businesses will produce less. The higher interest rate incentivizes the households to invest rather than spend. Hence, the purchase by the households reduces.

A reduction in money supply by $76 billion will reduce the GDP by $70 billion.

Inserting this new value into the earlier exchange equation:

$$\begin{gathered} 76×3.5=NominalGDP \\ NominalGDP=266 \end{gathered}$$

The decrease in the nominal GDP is 336 – 266 = $70 billion.