Question

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

Short answer

The velocity of money (V) can be found using the modified formula \(V = \frac{GDP}{M}\) with the given values of Nominal GDP (1,500) and Money Supply (400). Plugging in the values, we get \(V = \frac{1500}{400} = 3.75\). Therefore, the velocity of money is 3.75.

Step-by-step solution

Identify the Given Information

We are given: - Nominal GDP (GDP) = 1,500 - Money Supply (M) = 400 Step 2: Modify the Quantity Equation Formula

Modify the Quantity Equation Formula

Since we don't have information about the price level (P) and real GDP (Y), we need to modify the formula for the quantity equation to use only the given information. The modified formula is: \(V = \frac{GDP}{M}\) Step 3: Calculate the Velocity of Money

Calculate the Velocity of Money

Using the modified formula, we can find the velocity of money by plugging in the given values: \(V = \frac{1500}{400}\) Step 4: Simplify the Calculation

Simplify the Calculation

Now we just need to simplify the calculation to get the final result: \(V = 3.75\) The velocity of money is 3.75.

Key concepts

Nominal GDP

Nominal GDP, or Gross Domestic Product, is a measure of the total economic output of a country, valued at current market prices. This means it includes all goods and services produced over a specific time period, calculated using the prices that are current in the market during that time. Unlike real GDP, which adjusts for inflation, nominal GDP does not provide insight into the actual volume of goods and services in an economy but rather reflects their monetary value.
In the original exercise, the nominal GDP is given as 1,500. This figure helps us understand the scale of economic activity in monetary terms for that period. By using the nominal GDP in calculations, we ensure that we're working with a clear representation of the dollar value of all final goods and services produced.
To figure out related economic metrics, like the velocity of money, nominal GDP becomes an essential part of the equation. It allows us to see how much money circulates within an economy by comparing it to other variables, like the money supply.

Quantity Equation

The quantity equation is a fundamental formula in the study of monetary economics. It's primarily used to link the money supply, the velocity of money, and the economy's overall output. The conventional form of the quantity equation is:\[ MV = PY \]Where:- \(M\) represents the money supply,- \(V\) is the velocity of money,- \(P\) stands for the price level,- \(Y\) denotes the real GDP.
This basic framework illustrates how changes in the money supply and velocity can impact the nominal economy (via price levels and output).
In our example, we modify this equation because we only have nominal GDP (which is \(PY\) combined) and the money supply \(M\). Therefore, we use the modified version:\[ V = \frac{GDP}{M} \]This allows us to solve for the velocity of money directly using the given GDP and the money supply, offering insights into how frequently money changes hands in the economy.

Money Supply

The money supply is a key term referring to the total amount of monetary assets available in an economy at a given time. It encompasses all liquid forms of money, such as cash, demand deposits, and other easily accessible accounts.
The money supply plays a critical role in economic stability and functioning. It influences interest rates, inflation, and growth. Changes in the money supply can impact how money flows through the economy, affecting overall economic health.
In the original exercise, the money supply is specified as 400. This refers to the total "stock" of monetary assets available for transactions. By employing the money supply in the modified quantity equation, we can determine the velocity of money, reflecting how actively money is being used in transactions.

• Always keep in mind the money supply's role in affecting inflation and purchasing power.
• It helps governments and policymakers to implement fiscal and monetary policies effectively.

Through such concepts, students can grasp how different parts of an economy connect and influence each other.