The money supply in Tazland is 400 billion Nominal GDP is 80

The money supply in Tazland is $400 billion. Nominal GDP is $800 billion and real GDP is $400 billion. What are the price level and velocity in Tazland?

A) The price level ad velocity are both 2

B) The price level is 4 and the velocity is 8

C) The price level is 8 and velocity is 4

D) The price level and velocity are both 8

Solution

Price level = Nominal GDP / Real GDP = $800 billion / $400 billion = 2

As per quantity theory of money,

Money supply x Velocity = Nominal GDP

$400 billion x Velocity = $800 billion

Velocity = $800 billion / $400 billion = 2

Correct option (A)