Question

What happens to nominal GDP if the money supply grows by $17\%$ but velocity declines by $24\%$?

Short answer

Nominal GDP decreases by$7\%$.

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. What happens to the nominal GDP?

According to quantity theory of money equation,
$MY=PV$
Growth of nominal GDP$=$Growth of money supply$+$ Growth of velocity
role="math" localid="1647087667890" $$\begin{gathered} =24\%-17\% \\ =-7\% \end{gathered}$$
Therefore, the nominal GDP decreases by$7\%$.