If nominal GDP is $300 billion and the money supply is $20 billion, What must be the velocity? (b)If the money supply decreases and the velocity does not change, what will happen to nominal GDP?

Question

If nominal GDP is $300 billion and the money supply is $20 billion, What must be the velocity? (b)If the money supply decreases and the velocity does not change, what will happen to nominal GDP?

Answer 1

To calculate the velocity of money (V), we can use the equation:

V = (Nominal GDP) / (Money Supply)

In this case, the nominal GDP is given as $300 billion and the money supply is $20 billion.

So, we can substitute these values into the equation:

V = $300 billion / $20 billion = 15

Therefore, the velocity of money in this case is 15.

Now, let's move on to the second part of the question.

If the money supply decreases and the velocity of money remains unchanged, the nominal GDP will decrease.

This is because the equation for nominal GDP is:

Nominal GDP = (Money Supply) * (Velocity)

If the velocity remains the same, any decrease in the money supply will directly proportionally decrease the nominal GDP.

Therefore, if the money supply decreases while the velocity remains unchanged, the nominal GDP will decrease as well.