Velocity

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Velocity

The number of times a dollar is spent, or turns over, in a specific period of time. Velocity affects the amount of economic activity generated by a given money supply.

Velocity of Money

The rate at which money changes hands. For example, assume an economy with $100 and two people in it. In a given year, if Person A charges Person B $50 for a widget, and Person B charges Person A $100 for a whatsit, then $150 worth of transaction has occurred even though there are only $100 in the economy. This means that, on average, one dollar is spent one and a half times in a year, expressed as a velocity of 1.5/year. Velocity of money is useful as a measure of how strong and/or liquid an economy is, and it is usually compared with some figure such as GDP or money supply.
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