The Optimistic Economic Scenario: Understanding Money Velocity

What is the velocity of money in the given scenario?

If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, then what is the velocity of money?

The velocity of money in the provided scenario is 10

The velocity of money indicates how many times a dollar circulates within the economy during a specific period.

Money velocity is a key indicator in economics that measures how rapidly money is circulating in the economy. In the given scenario where the real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, we can calculate the velocity of money using the equation:

V = P x G / M

Where: V is the velocity of money, P is the price level, G is the real GDP, and M is the money supply.

By plugging in the values: P = 1.25, G = $4 billion, M = $500 million,

We get: V = 1.25 x 4 / 0.5 V = 5 / 0.5 V = 10

Therefore, the velocity of money in this scenario is 10. This means that on average, a dollar circulates 10 times within the economy during the specified period, indicating a high level of economic activity and exchange.