Suppose the nominal GDP is $25 million, the price level is 1.25, and the central bank has set the money supply at $10 million. What is the real GDP and the velocity of money according to the quantity theory of money

Real GDP and the velocity of money is $20,000,000 and 2.5

Given that;

Nominal GDP = $25

Price level = 1.25

Money supply = $10 million

Find:

Real GDP and the velocity of money

Computation:

25,000,000 = Real GDP × 1.25

Real GDP = 25,000,000 / 1.25

Real GDP = $20,000,000

1.25 × 20,00,000 = 10,000,000 × Velocity of money

Velocity of money = 2.5

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a) real GDP =$20,000,000

b)velocity of money is 2.50

Explanation:

Nominal GDP is normal spending carried out in terms of dollars.

Nominal GDP is the product of real GDP and price level

Nominal GDP= real GDP*Price level

Given the nominal GDP=$25 million and the price level =1.25 then,

$25000000=real GDP *1.25

$25000000/1.25 = real GDP

$20000000= real GDP

Apply the quantity equation in economics which is;

money supply*velocity of money =price level * real GDP

Given the money supply is=$10,000,000 then,

velocity of money = (price level*real GDP)/money supply

velocity of money = (1.25*20,000,000)/10,000,000

velocity of money =2.50

a

explanation:

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a.