Question

question
if the velocity of money is 2.5 and the money supply increases from 100 billion to 200 billion, then what will be the change in nominal gross domestic product?
select the correct answer below:
250 billion
100 billion
25 billion
150 billion

Explanation:

Step1: Recall the quantity equation

The quantity equation is \( MV = PY \), where \( M \) is the money supply, \( V \) is the velocity of money, \( P \) is the price level, and \( PY \) is the nominal GDP.

Step2: Calculate the initial nominal GDP

When \( M_1=100 \) billion and \( V = 2.5 \), using \( MV=PY \), we have \( PY_1=M_1V=(100)(2.5)=250 \) billion.

Step3: Calculate the final nominal GDP

When \( M_2 = 200 \) billion and \( V = 2.5 \), using \( MV = PY \), we have \( PY_2=M_2V=(200)(2.5)=500 \) billion.

Step4: Calculate the change in nominal GDP

The change \( \Delta PY=PY_2 - PY_1 \). So, \( \Delta PY=500 - 250=250 \) billion.

Answer:

250 billion