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13 October, 15:47

The quantity of money is $5 trillion, real GDP is $10 trillion, the price level is 0.9 , the real interest rate is 3 percent a year, and the nominal interest rate is 7 percent a year. Calculate the velocity of circulation, the value of M * V , and nominal GDP.

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  1. 13 October, 16:13
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    (a) 2

    (b) $10 trillion

    (c) $0.4 trillion

    Explanation:

    Given that,

    Quantity of money = $5 trillion

    Real GDP = $10 trillion

    Price level = 0.9

    Real interest rate = 3 percent

    Nominal interest rate = 7 percent

    Nominal interest rate = Real interest rate + Inflation rate

    7% = 3% + Inflation rate

    4% = Inflation rate

    Velocity of circulation:

    = GDP : Total money supply

    = ($10 * 1) : $5

    = 2

    M * V = $5 trillion * 2

    = $10 trillion

    Nominal GDP = Real GDP * Inflation

    = $10 trillion * 4%

    = $0.4 trillion
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