On a given aggregate demand curve,if the rate of spending growth is 10% and the growth rate of the money supply is 2%,then the velocity of money must be growing at:
A) 5%.
B) 8%.
C) 12%.
D) 20%.

Question

Quizplus · Accepted Answer

To calculate the velocity of money, we can use the equation:

Velocity of Money = Nominal GDP / Money Supply

Assuming that the rate of spending growth is equal to the growth rate of nominal GDP, which is 10%, we can determine the growth rate of nominal GDP as:

Growth rate of Nominal GDP = Rate of spending growth = 10%

Now, if the growth rate of the money supply is 2%, then we have:

Nominal GDP / Money Supply = 1 / (Money Supply / Nominal GDP)

Nominal GDP / Money Supply = 1 / (1 + growth rate of money supply)

Nominal GDP / Money Supply = 1 / (1 + 0.02) = 1 / 1.02

So, the velocity of money is:

Velocity of Money = Nominal GDP / Money Supply = 10% / (1 / 1.02) = 10.2%

Therefore, the velocity of money must be growing at 8%, which is the difference between the growth rate of nominal GDP (10%) and the growth rate of the money supply (2%).

On a Given Aggregate Demand Curve,if the Rate of Spending