Velocity of Money
Definition
Velocity of Money refers to how quickly money circulates within an economy. It measures how frequently one unit of currency is used to purchase goods and services during a specific period.
Analogy
Think about a basketball game where players pass the ball rapidly between each other. The faster they pass the ball, the quicker it moves around on the court. Similarly, when money changes hands frequently through transactions, it increases its velocity within the economy.
Related terms
Monetary Policy: Actions taken by central banks to control and influence interest rates and money supply.
Consumer Spending: The total expenditure by individuals on goods and services within an economy.
Liquidity Preference: People's desire to hold cash rather than invest or spend it due to uncertainty or preference for immediate access to funds.
"Velocity of Money" appears in:
Additional resources (1)
Practice Questions (3)
What happens to the velocity of money if the money supply doubles and the GDP stays the same?
What is the result of a decrease in the money supply on the price level in the long run, assuming the velocity of money and real GDP remain constant?
If the velocity of money increases while the money supply remains constant, what is likely to happen to the nominal GDP, assuming that the price level remains constant?
Resources
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