Question

Suppose the price level, as measured by the GDP deflator, is 1.05, the supply of money, measured by M1, is $3.0 trillion, and output, measured by real GDP, is $18.5 trillion. What is the velocity of money? Provide your answer as a number rounded to two decimal places. Do not include any symbols, such as "$," "," "%," or "," in your answer.

Answer 1

The velocity of money in this scenario is calculated as the nominal GDP divided by the money supply. With a real GDP of $18.5 trillion, a GDP deflator of 1.05, and an M1 money supply of $3.0 trillion, the velocity of money is 6.48.

Step-by-step explanation:

The velocity of money is a critical concept in economics that helps us understand the rate at which money circulates in the economy. It is calculated by dividing the nominal GDP by the money supply. In the scenario provided, the price level, as measured by the GDP deflator, is 1.05, and this indicates the nominal GDP by multiplying the real GDP (which is $18.5 trillion) by the deflator.

Therefore, the nominal GDP is $18.5 trillion * 1.05 = $19.425 trillion. Using the formula for velocity (Velocity = nominal GDP / money supply), and considering the supply of money, measured by M1, is $3.0 trillion, the velocity of money in this case can be calculated as $19.425 trillion / $3.0 trillion, which equals 6.48 when rounded to two decimal places.