The quantity of money is $5 trillion, real GDP is $10 trillion, the price level is 0.9, the real interest rate is 3 percent a year, and the nominal interest rate is 7 percent a year. Calculate the velocity of circulation, the value of M × V, and nominal GDP.

(a) 2

(b) $10 trillion

(c) $0.4 trillion

Explanation:

Given that,

Quantity of money = $5 trillion

Real GDP = $10 trillion

Price level = 0.9

Real interest rate = 3 percent

Nominal interest rate = 7 percent

Nominal interest rate = Real interest rate + Inflation rate

7% = 3% + Inflation rate

4% = Inflation rate

Velocity of circulation:

= GDP ÷ Total money supply

= ($10 × 1) ÷ $5

= 2

M × V = $5 trillion × 2

          = $10 trillion

Nominal GDP = Real GDP × Inflation

                       = $10 trillion × 4%

                       = $0.4 trillion

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