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: $20 million

Velocity of the money: $2.5

Explanation:

We have the formula to calculate:

- Price level = Nominal GDP / Real GDP

=> Real GDP = Nominal GDP / Price level = $25 / 1.25 = $20 million

- Velocity of the money x Money supply = Price level x Real GDP

=> Velocity of the money = Price level x Real GDP / Money supply

= 1.25 x 20 / 10 = $2.5

Conclusion:

According to the quantity theory of money, Real GDP is $20 million, and velocity of the money is $2.5

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