Figure 30-2.On the graph,MS represents the money supply and MD represents money demand.The usual quantities are measured along the axes.
-Refer to Figure 30-2.Suppose the relevant money-demand curve is the one labeled MD₁;also suppose the economy's real GDP is 20,000 for the year.If the money market is in equilibrium,then how many times per year is the typical dollar bill used to pay for a newly produced good or service?

Question

Figure 30-2.On the graph,MS represents the money supply and MD represents money demand.The usual quantities are measured along the axes.

-Refer to Figure 30-2.Suppose the relevant money-demand curve is the one labeled MD₁;also suppose the economy's real GDP is 20,000 for the year.If the money market is in equilibrium,then how many times per year is the typical dollar bill used to pay for a newly produced good or service?

Quizplus · Accepted Answer

To find the velocity of money, we need to divide the nominal GDP (which is equal to the money supply in equilibrium) by the real GDP. From the graph, we can see that the equilibrium point occurs where MS equals MD (i.e. where MD₁ intersects with M). At this point, the money supply is $160,000 and the real GDP is 20,000. Therefore, the velocity of money is 160,000 / 20,000 = 8. This means that a dollar bill is used 8 times per year to pay for newly produced goods or services. The correct answer is C.