Question

If \(1964 \mathrm{GNP}=\$ 622\) billion and the average money supply was \(\$ 155\) billion, what was the income velocity of money?

Short answer

The income velocity of money is \(4\).

Step-by-step solution

Write down the formula for the income velocity of money.

The formula for the income velocity of money is: Income Velocity of Money = GNP / Money Supply

Identify given values

We are given the GNP and Money Supply values: GNP = \(622\) billion dollars Money Supply = \(155\) billion dollars

Substitute given values into the formula

Substitute the given GNP and Money Supply values into the formula: Income Velocity of Money = \(622\) billion dollars / \(155\) billion dollars

Calculate the income velocity of money

Divide the given GNP value by the given Money Supply value: Income Velocity of Money = \(4\) The income velocity of money is \(4\). This means that each dollar in the money supply was used to generate $4 in Gross National Product.

Key concepts

Gross National Product

Gross National Product, often abbreviated as GNP, reflects the total economic output of a nation. It includes all goods and services produced by the populace, whether on domestic soil or abroad, provided they are owned by nationals. This differentiates GNP from Gross Domestic Product (GDP), which concerns economic activity within a nation’s borders.

Understanding GNP is crucial for evaluating a country's economic performance over time. By analyzing GNP, economists and policymakers can measure how effectively a country's citizens convert their resources into valuable goods and services. In the context of the income velocity of money, GNP plays a critical role as it represents the total spending on a nation's output. The income velocity calculates how many times money circulates through the economy, and this can be largely influenced by fluctuations in GNP. The higher the GNP, the more transactions occur in an economy, thus potentially increasing money velocity.

money supply

The money supply is a fundamental component of any economy, representing the total amount of monetary assets available at a specific time. It includes various forms of money, such as bills, coins, and potentially liquid assets readily convertible to cash. The money supply can be categorized into several components:

• M0: The total of all physical currency in circulation.
• M1: Includes M0 plus checking deposits and other funds that are easily accessible for spending.
• M2: Comprises M1 as well as savings accounts, money market accounts, and other near-money assets.

The money supply is crucial for regulating inflation, as excessive growth can lead to increased price levels. Additionally, it has a direct relationship with the income velocity of money. A stable money supply implies that economic growth needs alignment for the money to circulate effectively within the economy. In the provided exercise, understanding the money supply allows for the calculation of how frequently money changes hands in achieving the GNP.

economic formula

Economic formulas are essential tools for analyzing and interpreting economic data. They help in quantifying various elements, which leads to deeper insights and better decision-making. One prominent formula is the income velocity of money:

\[\text{Income Velocity of Money} = \frac{\text{GNP}}{\text{Money Supply}}\]This formula calculates how many times a unit of currency circulates within the economy over a period. A higher velocity indicates that a dollar is used multiple times, reflecting higher economic activity. Conversely, a lower velocity suggests money is stagnant, hinting at possible economic slowdowns.

Understanding this formula aids in assessing the efficiency and dynamism of an economy. It also sheds light on how changes in GNP and money supply can impact economic health. For students learning about economic formulas, grasping the income velocity is a step toward understanding larger macroeconomic dynamics.