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?
To determine the velocity of money, we can use the equation of quantity theory of money:
M x V = P x Y
Where:
M = Money supply
V = Velocity of money
P = Price level
Y = Real GDP (or output)
In the first part of the question, we are given that Nominal GDP (Y) is $300 billion and the money supply (M) is $20 billion. To find the velocity (V), we rearrange the equation as follows:
V = (P x Y) / M
Since the question does not provide the price level (P), we cannot calculate the velocity with the given information.
Moving on to the second part of the question, if the money supply decreases and the velocity does not change, we need to analyze the relationship between the nominal GDP and the money supply.
When the money supply decreases, it means that the M in the equation decreases. However, since the velocity (V) remains constant, the decrease in M will not directly affect V.
Using the equation of quantity theory of money, we can rewrite it in terms of nominal GDP (Y) as follows:
M x V = P x Y
If V remains constant and M decreases, the nominal GDP (Y) will also decrease, as the product of M and V will decrease. Therefore, a decrease in the money supply, while holding velocity constant, will lead to a decrease in nominal GDP.