Suppose that the money supply is $1 trillion and nominal GDP is $10 trillion. Wh

Question

Suppose that the money supply is $1 trillion and nominal GDP is $10 trillion. What is the velocity of money? Number For the next two questions, suppose that the velocity of money permanently increases by 35%, if the money supply is not changed in response, which of the following will occur in the short run? O O O O Unemployment rises, prices rise, real GDP is unchanged Prices are unchanged, nominal GDP is unchanged, real GDP rises Real GDP is unchanged, nominal GDP rises, prices rise Real GDP, nominal GDP, and unemployment are all unchanged Unemployment falls, real GDP rises, prices rise What will happen in the long run? Real GDP, nominal GDP, and unemployment are all unchanged Real GDP is unchanged, nominal GDP rises, prices rise Unemployment rises, prices rise, real GDP is unchanged Prices are unchanged, nominal GDP is unchanged, real GDP rises Unemployment falls, real GDP rises, prices rise O O

Explanation / Answer

Answer -

Velocity of money is the rate at which money is circulated from one hand to another in an economy. It is the speed at which money changes hands.

Nominal GDP = Velocity * Money Supply

So Velocity = GDP/Money Supply = $10 trillion/$1 trillion = 10.

If velocity increases in short run, the money supply increases resulting in increase of inflation thus raising the nominal GDP but aggregate demand doesnt increase so real GDP remains same. Whereas in the long run aggregate demand increases and thus real GDP increases. Prices are adjusted and back to equilibrium because the costs for sellers are also adjusted.

Now if velocity increases by 35 % it becomes = 10*135% = 13.5%

When velocity is incresed by 35% in short run - C) real GDP is unchanged, nominal gdp rises and prices rices.

When velocity is incresed by 35% in long run - D) prices are unchanged, nominal gdp unchanged but real gdp rises.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.