Question

Question 11 pts

If the velocity of money is 6 when nominal GDP is $12 trillion, what will be the velocity of money when nominal GDP is 24 trillion according to the Classical model?

12

3

6

18

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Question 21 pts

Fiscal policies cause perfect crowding out according to Classical economists.

True

False

Answer 1

(Question 11) Option (A)

As per Classical quantity equation,

M x V = P x Y where M: Money supply, V: Velocity, P: price level, Y: Real GDP & (P x Y): Nominal GDP

When V = 6 & (P x Y) = $12 Trillion, M = (P x Y) / V = $12 Trillion / 6 = $2 Trillion

When (P x Y) = $24 Trillion, V = (P x Y) / M = $24 Trillion / $2 Trillion = 12

(Question 12) True

Classical LM curve and aggregate supply curve are vertical, therefore increase in government spending is exactly equal to decrease in investment (full crowding out).