Suppose that the money supply is $1 trillion and nominal GDP is $10 trillion. Wh

Question

Suppose that the money supply is $1 trillion and nominal GDP is $10 trillion. What is the velocity of money? Number For the next two questions, suppose that the velocity of money permanently increases by 25%. If the money supply is not changed in response, which of the following will occur in the short run? O Prices are unchanged, nominal GDP is unchanged, real GDP rises O Unemployment falls, real GDP rises, prices rise O Real GDP, nominal GDP, and unemployment are all unchanged O Unemployment rises, prices rise, real GDP is unchanged O Real GDP is unchanged, nominal GDP rises, prices rise What will happen in the long run? O O O O O Prices are unchanged, nominal GDP is unchanged, real GDP rises Unemployment rises, prices rise, real GDP is unchanged Real GDP, nominal GDP, and unemployment are all unchanged Real GDP is unchanged, nominal GDP rises, prices rise Unemployment falls, real GDP rises, prices rise

Explanation / Answer

Velocity=nominal money supply/ real money supply=10/1=10

New velocity=12.5.

price increase,real gdp remains same and nominal gdp increases

After increase in velocity, nominal money supply increases which increases price and nominal GDP and real GDP is constant. Ans is E

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