If the money supply is $500 and nominal income is $3,000, velocity is:

Question

BlackTom AI · Accepted Answer

Velocity of money is given by the equation V = (nominal income) / (money supply), so V = PY / M.

1) Relevant knowledge points and concepts
- The Fisher identity (or quantity equation) MV = PY relates money supply (M), velocity (V), price level times real output (PY, i.e., nominal income or nominal GDP).
- Velocity V is dimensionless and equals how many times, on average, a unit of money is used to purchase final goods and services in a period.

2) Step-by-step reasoning
- Identify the variables: nominal income (PY) = $3,000 and money supply (M) = $500.
- Use the formula V = PY / M.

3) Calculations with intermediate steps
- Substitute numbers: V = 3,000 / 500.
- Divide: 3,000 ÷ 500 = (3,000 ÷ 100) ÷ (500 ÷ 100) = 30 ÷ 5 = 6.
- So V = 6 (times per period).

4) Why the correct answer is correct
- The calculation follows directly from the standard definition of velocity. With $500 in money supply supporting $3,000 of nominal transactions, each dollar circulates, on average, 6 times to generate that level of nominal income.

5) Why the other options are incorrect
- a. 1/60 ≈ 0.0167: this would be the reciprocal of 60, far too small; it would imply each dollar circulates only 0.0167 times, inconsistent with 3,000/500.
- c. 1/6 ≈ 0.1667: this is the reciprocal of 6, not the correct division order; it would arise from mistakenly computing M / PY instead of PY / M.
- d. 60: this would be 3,000 ÷ 50, not 3,000 ÷ 500; it is ten times too large.

6) Conclusion
- The correct velocity is 6, matching answer choice b. 6.

If the money supply is $500 and nominal income is $3,000, velocity is:Single choice

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