If nominal GDP is $800 billion and, on average, each dollar is spent four times in the economy over a year, then the quantity of money demanded for transactions purposes will be
A) $200 billion.
B) $400 billion.
C) $800 billion.
D) $3,200 billion.

Question

Quizplus · Accepted Answer

The quantity of money demanded for transactions purposes can be calculated using the formula for the velocity of money: V = (P*Y)/M, where V is the velocity of money, P is the price level, Y is the real GDP, and M is the quantity of money. In this case, we are given that the nominal GDP (P*Y) is $800 billion and the velocity of money (V) is 4, meaning each dollar is spent four times. Rearranging the formula to solve for M gives us M = (P*Y)/V = $800 billion / 4 = $200 billion.

If Nominal GDP Is $800 Billion And, on Average, Each