Final answer:
The velocity of money in the given scenario would be 1 if $5 is spent in a single transaction cycle. With an increased money supply to $10, aggregate spending could potentially increase, which might lead to inflation. In a larger economic context, an $800 billion increase in the money supply with a constant velocity could lead to a significant increase in nominal GDP.
Step-by-step explanation:
To calculate the velocity of money, we need to know the total amount of money used to buy goods and services within a certain period and the average amount of money in circulation during that period. In this case, with $5 being used to buy 10 products priced at $2 each, we have a discrepancy because the student does not have enough money to buy all 10 products.
However, if we assume the student meant they could buy 2.5 products with $5 (since 5/2 = 2.5), the velocity of money would be calculated by the number of times $5 is used to buy goods and services in a period. If the entire $5 is spent on 2.5 items at $2 each then the velocity would be 1, because the $5 circulates one time to purchase goods.
If the amount of money increases to $10 while the velocity and output remain the same, each dollar would still circulate at the same rate, but the total number of transactions or the aggregate spending would increase. This could potentially lead to inflation if output does not increase to match the increased money supply.
In a broader context, the quantity equation of money (M x V = P x T, where M is the money supply, V is the velocity, P is the price level, and T is the transaction volume) can be used to assess the impact of changes in the money supply on nominal GDP, as shown in the Calculating the Effects of Monetary Stimulus example. A $800 billion dollar increase in the money supply, with a velocity of 3, would ideally lead to a $2.4 trillion increase in nominal GDP, assuming other factors remain constant and prices are stable.