The equation of exchange is given by where M is the money supply, V is the veloc

Question

The equation of exchange is given by where M is the money supply, V is the velocity of money, P is the price level, and Y is the real GDP The following figure shows the aggregate demand (AD) and long run aggregate supply (LRAS) curves for a hypothetical economy, which is currently in a long run equilibrium: PRICE LEVEL 18 LRAS 15 12 AD 0 3 6912 15 REAL GDP Trillions of dollars] Which of the following statements are true for this hypothetical economy? Check all that apply. a. The nominal GDP in this economy is $81 trillion b.If the velocity of money is 1, then the money supply in this economy is $27 trillion C. The nominal GDP in this economy is $9 trillion d. If the velocity of money is 3, then the money supply in this economy is $27 trillion. e. If the velocity of money is 9, then the money supply in this economy is $9 trillion. f. The nominal GDP in this economy is $18 trillion

Explanation / Answer

Correct options: (a), (d), (e).

Equilibrium real GDP (Y) = $9 trillion and price level (P) = 9.

Nominal GDP = 9 x $9 trillion = $81 trillion [Option (a)].

If V = 3, then M = (P x Y) / V = $81 trillion / 3 = $27 trillion [Option (d)].

If V = 9, then M = (P x Y) / V = $81 trillion / 9 = $9 trillion [Option (e)].

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