Final answer:
The velocity of money, when the nominal money supply is $2 billion and nominal GDP is $16 billion, is calculated as 8. Using the equation of exchange, Velocity = Nominal GDP / Money Supply, we get a result of $16 billion divided by $2 billion, which equates to 8.
Step-by-step explanation:
The question involves calculating the velocity of money using the equation of exchange, which states that the Money Supply multiplied by its velocity is equal to the Nominal GDP. To find the velocity of money, we would divide the nominal GDP by the money supply. Given that the nominal money supply equals $2 billion and nominal GDP is $16 billion, the velocity of money can be found with this formula: Velocity = Nominal GDP / Money Supply = $16 billion / $2 billion = 8. So, option c) 8 is the correct answer to the question.
When considering changes in the money supply, like in the additional question where the central bank increases the money supply by $100 billion, and the velocity of money is 3, each dollar in the increased money supply will cycle through the economy 3 times. Therefore, the expansion in nominal GDP would be $100 billion times 3, equating to an increase of $300 billion.