Question

If the Federal Reserve increased the money supply by 4 percent per year, real GDP grew by 3 percent per year, and the rate of inflation was 3 percent per year, then velocity must have increased by approximately _______ percent per year.

A. 1
B. 2
C. 3
D. 6

Answer 1

B. 2

Step-by-step explanation:

The velocity of money in a economy is calculated with the Fisher Equation, is most simply expressed as:

MV=PY

where:

M=Money Supply =4%

V=Velocity of Circulation

P=Average Price Level =3%

Y=real GDP=3%

replacing terms and calculating por V:

V = PY/M

V = (3% * 3%) / 4%

V = 2.25%

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