Question

If GDP is 1,500 and the money supply is 400, what is velocity?

Short answer

The velocity of money is 3.75, meaning that on average, each unit of currency is used 3.75 times to purchase goods and services in the economy during this period.

Step-by-step solution

The formula to calculate the velocity of money is V = PQ / M, where V represents velocity, PQ represents the nominal GDP, and M is the money supply. #Step 2: Plug in the given values into the equation#

Given the Nominal GDP (PQ) is 1,500 and the Money Supply (M) is 400, the equation for velocity becomes: V = 1,500 / 400 #Step 3: Calculate the velocity#

Now, divide the nominal GDP by the money supply to find the velocity: V = \( \frac{1500}{400} = 3.75 \) #Step 4: Interpret the result#

The velocity of money is 3.75, which means that on average, each unit of currency is used 3.75 times to purchase goods and services in the economy during this period.