Question

If a country increases its money supply by 2%, and its nominal GDP increases by 3%,...

If a country increases its money supply by 2%, and its nominal GDP increases by 3%, what can you say about what happened to the velocity of money in this country?

Group of answer choices

We cannot tell which way it changed.

It decreased.

It increased.

It did not change.

None of the other options.

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Homework Answers

Answer #1

The velocity of money is given by the formula:

Velocity of money = Nominal GDP / Money supply

Let's assume initial Nominal GDP = x and money supply = y

Change in money supply = 2%
Thus, new money supply = 1.02x

Change in nominal GDP = 3%
New Nominal GDP = 1.03x

Original Velocity of money = Nominal GDP / Money supply = x/y

New velocity of money = New Nominal GDP / New Money supply = (1.03x / 1.02x) = 1.009 (x/y) > x/y

Thus, the Velocity of money will increase.

2nd option is the correct answer.

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