The money supply in Muckland is $100 billion.Nominal GDP is $800 billion and real GDP is $200 billion.What are the price level and velocity in Muckland?
A)The price level and velocity are both 8.
B)The price level is 2 and velocity is 8.
C)The price level and velocity are both 4.
D)The price level is 4 and velocity is 8.

Question

Quizplus · Accepted Answer

Using the equation of exchange, we can find the velocity of money as follows:

MV=PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP.

So, V = PQ/M = $800 billion/$100 billion = 8

To find the price level, we can use the GDP deflator, which is the ratio of nominal to real GDP:

GDP deflator = (nominal GDP/real GDP) x 100
= ($800 billion/$200 billion) x 100
= 400

The price level is then the GDP deflator divided by 100:

Price level = GDP deflator/100 = 4

Therefore, the correct answer is D. The price level is 4 and velocity is 8.

The Money Supply in Muckland Is $100 Billion