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Chapter 28: Problem 42

If GDP is 1,500 and the money supply is 400, what is velocity?

Short Answer

Expert verified
The velocity of money is 3.75, meaning that on average, each unit of currency is used 3.75 times to purchase goods and services in the economy during this period.

Step by step solution

01

The formula to calculate the velocity of money is V = PQ / M, where V represents velocity, PQ represents the nominal GDP, and M is the money supply. #Step 2: Plug in the given values into the equation#

Given the Nominal GDP (PQ) is 1,500 and the Money Supply (M) is 400, the equation for velocity becomes: V = 1,500 / 400 #Step 3: Calculate the velocity#
02

Now, divide the nominal GDP by the money supply to find the velocity: V = \( \frac{1500}{400} = 3.75 \) #Step 4: Interpret the result#

The velocity of money is 3.75, which means that on average, each unit of currency is used 3.75 times to purchase goods and services in the economy during this period.

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Most popular questions from this chapter

A well-known economic model called the Phillips Curve (discussed in The Keynesian Perspective chapter) describes the short run tradeoff typically observed between inflation and unemployment. Based on the discussion of expansionary and contractionary monetary policy, explain why one of these variables usually falls when the other rises.

How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?

If the central bank sells \(\$ 500\) in bonds to a bank that has issued \(\$ 10,000\) in loans and is exactly meeting the reserve requirement of \(10 \%,\) what will happen to the amount of loans and to the money supply in general?

How does rule-based monetary policy differ from discretionary monetary policy (that is, monetary policy not based on a rule)? What are some of the arguments for each?

In a program of deposit insurance as it is operated in the United States, what is being insured and who pays the insurance premiums?
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