Understanding GDP Calculation

Analysis of GDP Calculation Based on Given Data

Assume that the money supply in an economy is $250 billion, the price level is 1.25, and the average dollar is spent four times in a year. Based on this data, which of the following must be true?

a. The nominal GDP is $78 billion.
b. The real GDP is $80 billion.
c. The nominal GDP is $313 billion.
d. The nominal GDP is $500 billion.
e. The real GDP is $800 billion.

Based on the given data, the money supply in the economy is $250 billion, the price level is 1.25, and the average dollar is spent four times in a year. We can use these terms to find the correct answer.

First, we can calculate the Nominal GDP using the formula:
Nominal GDP = Money Supply × Velocity of Money

Here, the velocity of money is the number of times the average dollar is spent in a year, which is given as 4. So, we have:
Nominal GDP = $250 billion × 4
Nominal GDP = $1000 billion

Now, we can calculate the Real GDP using the formula:
Real GDP = Nominal GDP / Price Level

Real GDP = $1000 billion / 1.25
Real GDP = $800 billion

Based on these calculations, the correct answer is:
e. The real GDP is $800 billion.

Do you understand how to calculate GDP based on the given data?

Yes, by using the formulas for Nominal GDP and Real GDP, we can determine the correct value based on the money supply, price level, and velocity of money.