The quantity of money is $5 trillion, real GDP is $10 trillion, the price level is 0.9, the real interest rate is 3 percent a year, and the nominal interest rate is 7 percent a year. Calculate the velocity of circulation, the value of M × V, and nominal GDP.

(a) 2

(b) $10 trillion

(c) $0.4 trillion

Explanation:

Given that,

Quantity of money = $5 trillion

Real GDP = $10 trillion

Price level = 0.9

Real interest rate = 3 percent

Nominal interest rate = 7 percent

Nominal interest rate = Real interest rate + Inflation rate

7% = 3% + Inflation rate

4% = Inflation rate

Velocity of circulation:

= GDP ÷ Total money supply

= ($10 × 1) ÷ $5

= 2

M × V = $5 trillion × 2

          = $10 trillion

Nominal GDP = Real GDP × Inflation

                       = $10 trillion × 4%

                       = $0.4 trillion

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- rich people tend to have more capital in their disposal. this would benefit them in business since it is far easier for them to fund their business operation compared to poor people.