Figure 30-3

On the following graph, MS represents the money supply and MD represents money demand.

Refer to Figure 30-3. Suppose the relevant money-supply curve is the one labeled MS1 ; also suppose the economy's real GDP is 30,000 for the year. If the market for money is in equilibrium, then the velocity of money is approximately

Question

Figure 30-3

On the following graph, MS represents the money supply and MD represents money demand.

​

Refer to Figure 30-3. Suppose the relevant money-supply curve is the one labeled MS1 ; also suppose the economy's real GDP is 30,000 for the year. If the market for money is in equilibrium, then the velocity of money is approximately

BlackTom AI · Accepted Answer

The velocity of money follows MV = PY, so V = PY / M.

Step 1 — identify variables from the graph and text:
- Real GDP (Y) is given as 30,000.
- The relevant money supply curve is MS1, which is the vertical line at quantity of money M = 10,000 (as labeled on the horizontal axis).
- The vertical axis shows the value of money at the equilibrium where MS1 meets MD is 0.5. The "value of money" = 1 / P, so 0.5 = 1 / P.

Step 2 — compute the price level (P):
0.5 = 1 / P implies P = 1 / 0.5 = 2.

Step 3 — compute nominal GDP (PY):
PY = P × Y = 2 × 30,000 = 60,000.

Step 4 — compute velocity V:
V = (PY) / M = 60,000 / 10,000 = 6.0.

Why this answer is correct:
The algebraic steps directly use the standard quantity equation and the graph’s indicated money supply and value of money. With M = 10,000 and P = 2, nominal spending is 60,000, which divided by money stock gives velocity 6.0.

Why the other choices are incorrect:
- 9.0 would require PY = 90,000 given M = 10,000 (not supported by P and Y).
- 1.5 would require PY = 15,000 (too low).
- 3.0 would require PY = 30,000 (again inconsistent with P = 2 and Y = 30,000).
None of these match the graph-derived nominal GDP of 60,000.

Conclusion: The velocity of money is approximately 6.0, which matches the provided correct answer.

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