TutorOn by Sanath Withanage

Question:

Suppose that in a hypothetical economy, real GDP equals Rs. 80 trillion, nominal GDP equals Rs. 240 trillion, and the general price level equals 3. If the money supply in this economy is Rs. 30 trillion, then the velocity of circulation of money is
(1) 8
(2) 10
(3) 30
(4) 80
(5) 90

Correct Answer:

(1)

Answer Explanation:

Use the Equation of Exchange: $M times V = P times Y$. We know Money Supply ($M$) = 30, Price Level ($P$) = 3, and Real GDP ($Y$) = 80. Therefore: $30 times V = 3 times 80 rightarrow 30V = 240 rightarrow V = 240 / 30 = 8$.

Topic: Inflation Year: 2020