Answer to Question #33364 in Microeconomics for Summer

Question #33364
Assume that a country estimates its M1 money supply at $20 million. A broader measure of the money supply, M2, is $50 million. The country’s gross domestic product is $100 million. Production or real output for the country is 500,000 units or products. a. Determine the velocity of money based on the M1 money supply. b. Determine the velocity of money based on the M2 money supply. c. Determine the average price for the real output. Other checkable deposits $12 million
Expert's answer
a. We find the velosity from the Fisher's formula:
P*Q = M*V, GDP = M*V
V = M1/GDP = 20/100 = 0.2
b. V = M2/GDP = 50/100 = 0.5
c. P = GDP/Q = 100 million/500,000 = $200

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