If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions is equal to:
A)four percent of nominal GDP.
B)25 percent of nominal GDP.
C)nominal GDP multiplied times 4.
D)nominal GDP divided by 25.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the velocity of money (i.e. the number of times money is spent in a year) multiplied by the quantity of money equals nominal GDP. Therefore, solving for the quantity of money people will wish to hold for transactions:
Velocity of money = 4
Nominal GDP = 100 (since we're using percentages, we can assume nominal GDP is 100)
Quantity of money for transactions = Nominal GDP / Velocity of money
= 100 / 4
= 25
Therefore, people will wish to hold 25% of nominal GDP for transactions, which is option B.

If the Dollars Held for Transactions Purposes Are, on the Average