suppose we observed an economy in which changes in the money supply produce no changes whatever...
suppose we observed an economy in which changes in the money supply produce no changes whatever in nominal GDP. what could we conclude about velocity
Homework Answers
Ans. We know that M × V = Nominal GDP
Now if there is no change in Nominal GDP due to change in money supply , this would mean that Velocity of money would be inversely and proportionally related to money supply.
For eg if initially , 1 × 1 = 1
Then if money supply increased to 5 , then
( 1 × 5 ) × 1 ( 1 ÷ 5 ) = 1
This means that Nominal GDP will not change.
Because Velocity of money is equal to 1 divided by the change in money supply .
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