Question

Suppose that the money supply of a country is $75 billion and the velocity of money is 3. The economy's total production quantity is 522 billion units. Instructions: In part a, round your answer to 2 decimal places. In part b, enter your answer as a whole number.

a. According to monetarist thought, what will be the average price of a good produced in this economy?
b. What is this country's GDP?

Answer 1

a. $0.43

b. $224.46 billion

Step-by-step explanation:

a. Monetarists subscribe to the Quantity theory which is:

Money Supply * Velocity = Average price * Total production quantity

So, average price is:

Average Price = (Money Supply * Velocity) / Total production quantity

Average price = (75 * 3) / 522

= $0.43

b. The GDP is the final value of goods and services produced in the country so the GDP is:

= Price level * Total Production quantity

= 0.43 * 522 billion

= $224.46 billion