Question

If GDP now falls back to 1,500 and the money supply falls to \(350,\) what is velocity?

Short answer

The velocity of money (V) can be calculated using the equation of exchange MV = PQ, where M is the money supply and PQ represents nominal GDP. Given a money supply (M) of $350 and nominal GDP (PQ) of 1,500, we can solve for V by dividing both sides by 350. Thus, V = 1,500 / 350 = 4.29 (approximately). The velocity of money in this case is approximately 4.29.

Step-by-step solution

Write down the equation of exchange.

The equation of exchange is: MV = PQ where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP.

Plug in the given values for M and PQ.

We are given that the money supply (M) is $350 and the GDP (PQ) is 1,500. Now we will plug these values into the equation: (350)V = 1,500

Solve for V (velocity of money).

To find the velocity of money (V), we simply need to divide both sides of the equation by M (350): V = 1,500 / 350

Calculate the velocity of money.

Now we perform the operation to find the final answer: V = 1,500 / 350 = 4.29 (approximately) The velocity of money is approximately 4.29.