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Chapter 15: Problem 44

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

Short Answer

Expert verified
The velocity of money in this scenario is approximately 4.29, which can be calculated using the formula V = Nominal GDP / Money Supply, where Nominal GDP = 1,500 and Money Supply = $350. So, V = \( \frac{1500}{350} \) ≈ 4.29. This means that, on average, each unit of currency is used in transactions worth 4.29 times the value of the money supply over the course of a year.

Step by step solution

01

Identify the given values

We are given the following information: - Nominal GDP = 1,500 - Money Supply = $350
02

Use the formula for velocity of money

The formula for velocity of money is: V = Nominal GDP / Money Supply
03

Substitute the given values into the formula

Now, replace the given values for nominal GDP and money supply in the formula: V = 1,500 / 350
04

Calculate the velocity of money

Divide 1,500 by 350 to get the velocity of money: V = \( \frac{1500}{350} \) ≈ 4.29
05

Interpret the result

The velocity of money in this scenario is approximately 4.29. This means that, on average, each unit of currency is used in transactions worth 4.29 times the value of the money supply over the course of a year.

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Most popular questions from this chapter

How does a monetary policy of inflation target work?

Suppose the Fed conducts an open market purchase by buying 10 million dollar in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets - reserves \(30,\) bonds 50 and loans \(50 ;\) Liabilities - deposits 300 and equity 30 .

Which kind of monetary policy would you expect in response to high inflation: expansionary or contractionary? Why?

Explain how to use an open market operation to expand the money supply.

Define the velocity of the money supply.
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