Figure 34-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs. . -Refer to Figure 34-2.Assume the money market is always in equilibrium,and suppose r₁ = 0.08;r₂ = 0.12;Y₁ = 13,000;Y₂ = 10,000;P₁ = 1.0;and P₂ = 1.2.Which of the following statements is correct? A)When r = r₂,nominal output is higher than it is when r = r₁. B)When r = r₂,real output is higher than it is when r = r₁. C)When r = r₂,the expected rate of inflation is higher than it is when r = r₁. D)If the velocity of money is 4 when r = r₂,then the quantity of money is $3,000.

Question

Quizplus · Accepted Answer

The velocity of money (V) is calculated as nominal GDP (P*Y) divided by the money supply (M). Given V = 4, P = 1.2, and Y = 10,000 when r = r2, nominal GDP is 12,000. Solving for M gives M = 12,000 / 4 = $3,000.