Suppose a country has a velocity of money equal to 12 and a nominal GDP of $30 billion. This means that each dollar in this economy is supporting approximately:
A)$10 in total income.
B)$30 in total income.
C)$1.5 in total income.
D)$12 in total income.

Question

Quizplus · Accepted Answer

The velocity of money is defined as the rate at which money circulates in the economy and is calculated as nominal GDP divided by the money supply. Given a velocity of 12 and a nominal GDP of $30 billion, each dollar supports $30 billion / $2.5 billion = $12 in total income, where $2.5 billion is the implied money supply ($30 billion / 12).

Suppose a Country Has a Velocity of Money Equal to 12