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 ..............

Hint:

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.

Answer 1

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: \[ \boxed{20} \]