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
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To determine the income velocity, we need to use the equation of money velocity, which is given by:
Velocity of Money = Nominal GDP / Money Supply
Given the following information:
- Money Supply = $1 trillion
- Price Level = 2
- Real GDP = $5 trillion
We can calculate the Nominal GDP by multiplying the Price Level with the Real GDP:
Nominal GDP = Price Level * Real GDP
= 2 * $5 trillion
= $10 trillion
Now, we can compute the Velocity of Money using the formula mentioned above:
Velocity of Money = Nominal GDP / Money Supply
= $10 trillion / $1 trillion
= 10
Therefore, the income velocity is 10.