Question

All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3? (Use this information as necessary to answer the following 4 questions.)

a. $100 billion
b. $200 billion
c. $300 billion
d. $400 billion

Answer 1

When the central bank increases the money supply by $100 billion and the velocity of money is 3, the nominal GDP will expand by $300 billion ($100 billion times velocity of 3).

Step-by-step explanation:

The question asks by how much the nominal GDP will expand if the central bank increases the money supply by $100 billion, given that the velocity of money is 3.

To determine the impact on the nominal GDP, we use the formula MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services (which equals nominal GDP when P is constant).

Using this equation, an increase of $100 billion in the money supply with a constant velocity of money at 3 implies that the nominal GDP will expand by $300 billion (100 billion * 3 = 300 billion).

Therefore, the correct answer is c. $300 billion.