Velocity of Money


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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.
References in periodicals archive ?
Solving equation 10 for Y and multiplying both sides by P/M, yields the derived income velocity of money (V):
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.
Typically, economists assume that technological innovations in the banking industry will lead to an increase in the velocity of money.
This practice increases the velocity of money creation, because the bank's reserves are used to back up an increasingly large volume of loans.
The velocity of money shows a decreasing trend over the period from 1973 to 2005.
Our results provide evidence that a definition of transactions money that accounts for sweeps can generate reliable long-run relationships involving the velocity of money.
In other words, an increase in the quantity of money demanded (because of a rise in stock prices) relative to income is related to a decrease in the velocity of money.
In fact, for the students to comprehend the quantity of money, they first need to have a good grasp of such elusive concepts as the quantity of money, the velocity of money, as well as the distinction between nominal income and real income.
First, the money supply is already increasing at a higher rate than the production potential plus the change in the income velocity of money plus the allowable level of the increase in the price level.
The decline in the income velocity of money during the 1980s is proof that the long recovery was not a Keynesian demand phenomenon.
Furthermore, as argued by Campbell and Tullock [10], there had been noticeable changes in the rate of velocity of money.

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