If the fraction of the economy's nominal GDP held by the public in the form of money is 20 percent, income velocity in the economy is
A) 5.
B) 80 percent.
C) 0.20.
D) 20.

Question

Quizplus · Accepted Answer

The equation of Quantity Theory of Money stated as MV=PQ where M is money supply, V is velocity of money, P is the price level, and Q is real output. Rearranging this equation, we can get V=M/PQ.

Given that the fraction of the economy's nominal GDP held by the public in the form of money is 20 percent or 0.20, we can assume that velocity is equal to 1/0.20 or 5. Therefore, the correct answer is A) 5.

If the Fraction of the Economy's Nominal GDP Held by the Public