Final answer:
By applying the quantity theory of money, MV = PQ, with the given money supply of $80 billion and a velocity of 4, the average price of a good in the economy is determined to be $0.80.
Step-by-step explanation:
The student's question is about determining the average price of a good in an economy using monetarist principles, specifically the quantity theory of money. This theory is often encapsulated in an equation: MV = PQ, where M stands for the money supply, V is the velocity of money, P is the price level, and Q represents the quantity of goods and services produced.
In this scenario, the money supply (M) is $80 billion, and the velocity of money (V) is 4. The total production (Q) is given as 400 billion units. To find the average price (P), we first calculate MV (the total spending) and then divide by Q (the total production).
Total spending (MV) = $80 billion x 4 = $320 billion.
To find the average price (P), we divide the total spending by the total production:
Average Price (P) = Total Spending (MV) / Total Production (Q)
Average Price (P) = $320 billion / 400 billion units
Average Price (P) = $0.80 per unit
Therefore, the average price of a good produced in this economy would be $0.80.