Question

Calculate what happens to nominal GDP if velocity remains constant at 4 and the money supply increases 50%. Assume that GDP is now at $2 trillion

Answer 1

Constant velocity = 4

Nominal GDP₁ = $2 trillion

$Velocity = \frac{Nominal \;GDP}{Money \;supply} \\ 4 = \frac{2\; trillion}{Money \;supply_1} \\ Money \;supply_1 = 0.5 \; trillion \\ Money \;supply_2 = Money \;supply_1 + Money \;supply_1 \times 0.5 \\ = 0.5 + 0.25 = 0.75 \; trillion \\ 4 = \frac{Nominal \;GDP_2}{0.75 \; trillion} \\ Nominal \;GDP_2 = 3 \; trillion$

Nominal GDP will increase from $2 trillion to $3 trillion.