Final answer:
Using the equation of exchange (MV = PQ), where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP, the money supply can be calculated as 5,000,000 when the real output is $1,000,000, the price level is 20, and the velocity of money is 4.
Step-by-step explanation:
To calculate the money supply when you know the real output ($1,000,000), the price level (20), and the velocity of money (4), you can use the equation of exchange, which in economics is described as MV = PQ.
This equation represents the relationship between the quantity of money in the economy and the nominal level of output. Here, M stands for the money supply, V for the velocity of money, P for the price level, and Q for the quantity or the real GDP (output).
To find the money supply, we rearrange the equation as follows:
M = PQ / V
Using the values given:
M = (1,000,000 * 20) / 4
M = 20,000,000 / 4
M = 5,000,000
Therefore, the money supply is 5,000,000.