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Chapter 14: Problem 42

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

Short Answer

Expert verified
The velocity of money in this economy, calculated using the formula Velocity = \( \frac{GDP}{Money Supply} \), is 3.75. This means that each unit of currency is spent on average 3.75 times in a specific time period, indicating the rate at which money is circulating within the economy.

Step by step solution

01

Identify the given values

In this exercise, we are given: - GDP = 1,500 - Money Supply = 400
02

Apply the formula for velocity

Now that we know the GDP and Money Supply, we will use the formula to find the velocity: Velocity = GDP / Money Supply
03

Plug in the given values into the formula

Substitute the given values of GDP and Money Supply into the formula: Velocity = \( \frac{1,500}{400} \)
04

Calculate the velocity

Divide 1,500 by 400 to find the velocity: Velocity = \( 3.75 \)
05

Interpret the result

The velocity of money in this economy is 3.75, meaning that each unit of currency is spent on average 3.75 times in a specific time period. This is an indicator of how quickly money is circulating within the economy.

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