Question:
Suppose an economy produces 100 kg of rice in a year and sells that for Rs.100 per kg.
If the quantity of money in the economy is Rs.500, then the velocity of money is ..............
Suppose an economy produces 100 kg of rice in a year and sells that for Rs.100 per kg.
If the quantity of money in the economy is Rs.500, then the velocity of money is ..............
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The velocity of money measures how fast money circulates in an economy. It is calculated as the ratio of nominal GDP to the money supply.
Updated On: Sep 6, 2025
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Solution and Explanation
The velocity of money (\(V\)) is given by the equation:
\[
V = \frac{PY}{M}
\]
Where:
- \( P \) is the price level,
- \( Y \) is the total output (real GDP),
- \( M \) is the money supply.
Step 1: The total value of transactions in the economy is: \[ PY = 100 \, \text{kg} \times 100 \, \text{Rs/kg} = 10,000 \, \text{Rs} \] Step 2: The quantity of money \( M = 500 \, \text{Rs} \).
Step 3: Using the formula for the velocity of money: \[ V = \frac{10,000}{500} = 20 \] Thus, the velocity of money is 20.
Final Answer: \[ \boxed{20} \]
- \( P \) is the price level,
- \( Y \) is the total output (real GDP),
- \( M \) is the money supply.
Step 1: The total value of transactions in the economy is: \[ PY = 100 \, \text{kg} \times 100 \, \text{Rs/kg} = 10,000 \, \text{Rs} \] Step 2: The quantity of money \( M = 500 \, \text{Rs} \).
Step 3: Using the formula for the velocity of money: \[ V = \frac{10,000}{500} = 20 \] Thus, the velocity of money is 20.
Final Answer: \[ \boxed{20} \]
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