In Year 1 velocity is 5 and nominal income is $10 trillion. If the money supply doubles to $4 trillion in Year 2 according to the quantity theory of money what is nominal income in Year 2?

This statement provides context about the initial conditions but does not answer the question regarding nominal income in Year 2. It indicates the initial nominal income and the change in money supply, yet fails to perform the necessary calculation to determine the outcome for Year 2.

While this choice references the underlying principle that governs the relationship between money supply, velocity, and nominal income, it does not provide a numerical answer or calculation. It merely indicates the theoretical framework without addressing the specific question posed.

This figure incorrectly reflects the amount of money supply, not nominal income. The nominal income calculation based on the quantity theory of money, using the velocity of 5 and the doubled money supply of $4 trillion, results in $20 trillion, not $2 trillion.

This choice is not derived from the quantity theory of money calculations. The nominal income cannot be $14 trillion because, according to the formula (money supply × velocity), the correct output is $20 trillion when using the values given.

This is the correct calculation of nominal income for Year 2, as it results from multiplying the new money supply of $4 trillion by the velocity of 5.

This option represents an overestimation of nominal income. The calculation only accounts for the money supply of $4 trillion multiplied by the velocity of 5, yielding $20 trillion, not $40 trillion.