All other things being equal, by how much will nominal GDP expand if the central
ID: 1192472 • Letter: A
Question
All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3?
Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?
If GDP is 1,500 and the money supply is 400, what is velocity?
If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?
If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?
Explanation / Answer
We know that, Nominal GDP = Quantity of Money Supplied × Velocity of Money
a. If money supply is increased by $ 100 billion and velocity of money is 3 , then nominal GDP will expand by $100*3= $300 billion
b. If velocity of money increases by 50 %, new Velocity would be 3 + 50% of 3 = 4.5. The total increase in GDP would be 4.5 * $100 Billion = $450 Billion
c. GDP= 1500 and Money Supply = 400 , Velocity = 1500/400 = 3.75
d. GDP = 1600, Money Supply = 100, Velocity = 16. Hence change in velocity from the original velocity would be equal to 16-3 = 13 or an increase by 4.33 times
e. GDP= 1500, Money Supply = 350, Velocity = 1500/350 = 4.28