Suppose that the money supply and the nominal GDP for a hypothetical economy are

Question

Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and $336 billion, respectively.

What is the velocity of money?

Instructions: Round your answer to one decimal place.



How will households and businesses react if the central bank reduces the money supply by $25 billion? Households and businesses will not react OR Households and businesses will increase spending OR Households and businesses will reduce spending.

By how much will nominal GDP have to fall to restore equilibrium, according to the monetarist perspective? $ billion

Explanation / Answer

Velocity = 3.5 or 336/96. They will cut back on their spending to try to restore their desired ratio of money to other items of wealth. Nominal GDP will fall to $266 billion (= $76 billion remaining money supply x 3.5) to restore equilibrium

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