Question

Suppose that the money supply of a country is $80 billion and the velocity of money is 4. The economy's total production quantity is 400 billion units.

Instructions: In part a, round your answer to 1 decimal place. In part b, enter your answer as a whole number.
According to monetarist thought, what will be the average price of a good produced in this economy?
$____

Answer 1

The average price of a good produced in the given economy, based on monetarist thought and the velocity of money, will be $0.8 per unit.

Step-by-step explanation:

The question relates to the concept of the velocity of money and how it affects the average price of goods in an economy. Monetarist theory, considering the equation of exchange MV = PT, where M is the money supply, V is the velocity of money, P is the price level, and T is the quantity of goods and services produced, can be used to find the average price of goods when some of the variables are known.

In this case, the money supply (M) is $80 billion, the velocity of money (V) is 4, and the total production quantity (T) is 400 billion units.

Using the formula, we can derive the price level (P) as follows:

MV = PT leads to P = MV/T.

Substituting the given values into the equation provides P as:

P = ($80 billion * 4) / 400 billion units.

Therefore, P = 0.8, meaning the average price of a good produced in this economy will be $0.8 per unit.