Consider the following data: The money supply in $1 trillion, the price level equals 2, and real GDP is $5 trillion in base-year dollars. What is the income velocity of money?
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To calculate the income velocity of money, we need to use the formula:
Income Velocity of Money = Nominal GDP / Money Supply
Given the information provided, we have:
Nominal GDP = Price Level * Real GDP
Let's calculate each component step by step:
1. Nominal GDP:
Price Level = 2
Real GDP = $5 trillion
Nominal GDP = Price Level * Real GDP
= 2 * $5 trillion
= $10 trillion
2. Money Supply:
Money Supply = $1 trillion
Now, we can substitute the values into the equation:
Income Velocity of Money = Nominal GDP / Money Supply
= $10 trillion / $1 trillion
= 10
Therefore, the income velocity of money is 10.