Final answer:
The velocity of money is 4 when the nominal GDP is 1,000b and the M1 money stock is 250b, meaning each dollar circulates four times within the economy per year. Option A is correct.
Step-by-step explanation:
The velocity of money is calculated by dividing the nominal GDP by the money stock given by M1, which represents the total amount of currency in circulation and checking account balances. In the scenario provided, we have a nominal GDP of 1,000 billion and an M1 of 250 billion. To find the velocity of money, we perform the following calculation:
Velocity of Money = nominal GDP / M1 = 1,000b / 250b = 4
Therefore, the correct answer is A) 4, indicating that in this economy, each dollar of M1 is used on average four times to purchase final goods and services within a year.
The velocity of money can be calculated by dividing the nominal GDP by the money supply. In this case, the nominal GDP is 1,000b and the money stock (M1) is 250b. Therefore, the velocity of money in this economy is 4. This means that the average dollar circulates 4 times in a year.