Question

1. There are 3 dollars in the economy. One dollar of the money "changes hands" 10 times in a year, another dollar "changes hands" 5 times in a year, and the last dollar does not change hands at all. The velocity of money in the economy is:
A. 10 times a year.
B. 7.5 times a year.
C. 5 times a year.
D. The number of times a year that is "passed through someone’s hand" is between 0 and 10, but cannot be calculated.

2.Local government financing platforms are local state-owned enterprises controlled by local governments through which financing (issuing stocks, bonds and loans) is provided for the
construction of local infrastructure, utilities and other "public goods". Using the model of the market for loanable funds, which of the following statement is correct?
A． Local government financing platforms reduce private investment and increase total investment; reduce public savings and increase private savings.
B． Local government financing platforms reduce private investment and increase total investment; increase public and private savings.
C． Local government financing platforms reduce private investment and total investment; reduce public and private savings.
D． Local government financing platforms increase private investment and total investment; reduce public savings and increase private savings.

Answer 1

1. Velocity of money = Value of transactions/ Money Supply

Here, Value of transaction = (1*10) + (1*5) = 10+5 = 15

Money Supply = $3

Velocity of money = 15/3 = 5

Therefore, the correct answer is

2. Local government financing platforms provide for the construction of local infrastructure, utilities and other "public goods" through private and public firms and therefore, both private and total investments increase. Private savings increase because of increased income. However, public savings (Tax revenues - Government Expenditure) fall as the government expenditure increases. Therefore, the correct answer is : D. Local government financing platforms increase private investment and total investment; reduce public savings and increase private savings.