Chapter 35, Problem 6MCQ

To determine

What states GDP in the velocity equation

Answer to Problem 6MCQ

From the available options, the correct option is P × Y.

Explanation of Solution

As the velocity equation is M × V = P × Y where

M is the money supply,

V is the velocity of money,

P is the aggregate price level and

Y is the real GDP.

It means nominal GDP would be represented by P × Y as this GDP is at current price without considering inflation.

Therefore, the correct option is a (P × Y) and all other options are incorrect.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And according to monetarists, money supply is the large source that guide the economic development or growth in the country.