3) In other words, they failed to recognize how excessive increases in the nominal stock of money affect the velocity of money
and the price level; they overlooked the dynamic theory of money.
The reason for this was because the velocity of money
and the money multiplier had declined dramatically.
The velocity of money
often falls during recessions or shortly thereafter, and its decline can persist for a long time after an economic recovery has taken hold.
Besides, since the income velocity of money
is defined as the speed with which money changes hands, then it is likely that the behavior of the firm and agent must be more explicitly expressed in the equation of exchange as consumption and firm behavior would change when the price level, income, money or the interest rate change in the economy.
From (11) we can see that aggregate money holdings, and hence the velocity of money
, would change either because the time needed to clear checks can be shortened, or because it is more convenient to visit banks, i.
The velocity of money
movement will remain high for the next several years with the percentage of gross sales and redemptions remaining above historic industry averages, according to FRC.
The study found that mutual fund gross sales and redemptions reached their peak in 2007 and 2008, exceeding $2 trillion in each of those years, and while "the velocity of money
movement will remain high for the next several years," FRC suggests that $130 billion to $180 billion will flow annually into mutual funds over the next few years, or the low-to-mid-range of where they have stood over the past decade.
As previously mentioned in this column, it was not only money supply but also the velocity of money
in the economy that was relevant to inflation, with the latter becoming problematic due to bankingwoes.
The bits you need to know are: M is for money stock, and V is for the velocity of money
It's due to a sudden and sharp plunge in the velocity of money
- what we have been calling 'risk aversion hysteria' - where the speed with which money moves its way through the economy slows down as both consumers and businesses decide they want to increase their cash holdings," he explained.
Increasing money supply leads the economy with a pool of liquidity that in return will increase the velocity of money
and increase inflation.
The supply of money times the velocity of money
will equal the price level (inflation) times transactions, also known as economic output.