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Chapter 15: Q.41 (page 380)

Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?

Short Answer

Expert verified

The total increase of nominal GDP is $450.

Step by step solution

01

Equation for the Velocity of money

It is given that the Velocity of money was raised by 50%. Earlier velocity was 3. So, the latest velocity is estimated by

3+(50%×3)=3+3×50100

02

Money Supply

Suppose previously nominal GDP was $X Billion and velocity is 3.

So money supply was, as written below:

Money Supply =Nominal GDPVelocity

=$X3Billion

03

Nominal GDP

Now velocity has raised to 4.5. With the exact money supply, the Nominal GDP is calculated below:

Money Supply ×Velocity =Nominal GDP

Nominal GDP =$X3×4.5

=$3X2

04

Total increase of nominal GDP

The increase in Nominal GDP will be $3X2-X=$X2, which is 50% of the previous GDP

The total increase of nominal GDP due to $100 billion increase in money supply is given by:

$100Billion×localid="1645854955576" 4.5=Billion

The total increase of nominal GDP is $450

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