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Q. 43

Expert-verified
Found in: Page 690

### Principles of Economics

Book edition 2nd
Author(s) David Shapiro and Steven Greenlaw
Pages 892 pages
ISBN 9781947172364

# If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?

$\text{The new velocity of money is}4\text{. The velocity of money increases from}3.75\text{to}4..$

See the step by step solution

## Step 1 : Concept Introduction

Money supply: Monetary resource is that the total stock of cash within the economy at some extent of your time.

GDP (Gross Domestic Product): GDP of a rustic is that the value of all finished (final) goods and services produced in an economy during a specific year. It represents the economic well-being of a rustic because it is that the aggregate income of that economy.

Velocity of cash: It's the pace of circulation of money within the economy.

## Step 2 : Explanation of Solution

The velocity of cash is pace of circulation of cash within the economy. The formula for calculating velocity of cash is given below.$\text{Velocity of money}=\frac{\text{Nominal GDP}}{\text{Money supply}}$$⇒v=\frac{Y}{{M}^{s}}$

## Step 3 : Given information

$\text{Money supply,}{\mathrm{M}}^{\mathrm{S}}=400$

$\text{Nominal GDP}=1600$

## Step 4 : Calculation

$\text{With given money supply and nominal GDP, we calculate the velocity of money as follows:}$$\text{Velocity of money}=\frac{\text{Nominal GDP}}{\text{Money supply}}$$⇒v=\frac{Y}{{M}^{s}}$

$⇒v=\frac{1600}{400}$

$⇒v=4$

$\text{Hence, the velocity of money,}v\text{is}4\text{.}$