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10 January, 00:42

Suppose the nominal GDP is $25 million, the price level is 1.25, and the central bank has set the money supply at $10 million. What is the real GDP and the velocity of money according to the quantity theory of money

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Answers (2)
  1. 10 January, 01:08
    0
    Real GDP: $20 million

    Velocity of the money: $2.5

    Explanation:

    We have the formula to calculate:

    - Price level = Nominal GDP / Real GDP

    => Real GDP = Nominal GDP / Price level = $25 / 1.25 = $20 million

    - Velocity of the money x Money supply = Price level x Real GDP

    => Velocity of the money = Price level x Real GDP / Money supply

    = 1.25 x 20 / 10 = $2.5

    Conclusion:

    According to the quantity theory of money, Real GDP is $20 million, and velocity of the money is $2.5
  2. 10 January, 04:05
    0
    a) real GDP = $20,000,000

    b) velocity of money is 2.50

    Explanation:

    Nominal GDP is normal spending carried out in terms of dollars.

    Nominal GDP is the product of real GDP and price level

    Nominal GDP = real GDP*Price level

    Given the nominal GDP=$25 million and the price level = 1.25 then,

    $25000000=real GDP * 1.25

    $25000000/1.25 = real GDP

    $20000000 = real GDP

    Apply the quantity equation in economics which is;

    money supply*velocity of money = price level * real GDP

    Given the money supply is=$10,000,000 then,

    velocity of money = (price level*real GDP) / money supply

    velocity of money = (1.25*20,000,000) / 10,000,000

    velocity of money = 2.50
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