Question

Calculate what happens to nominal GDP if velocity remains constant at $4$and the money supply increases from $\backslash (250$billion to$\backslash )375$ billion.

Short answer

Nominal GDP is equal to$\$1$trillion.

The nominal GDP increases from $\$1$trillion to $\$1.5$trillion as the money supply increases from $\$250$billion to $\$375$billion

Step-by-step solution

Step 1. Define velocity.

A velocity of an item is a function of frequency and is defined as the rate of growth of its location with respect to the criteria of reference.

Step 2.

Original GDP$=\$1$ trillion
Nominal GDProle="math" localid="1647086787461" $=PY$
$MV=PY$
PY(original)$=250\times 4$

$=\$1$ trillion
PY(new)$=375\times 4$

$=\$1.5$ trillion
So, the nominal GDP increases from $\$1$ trillion to$\$1.5$ trillion.