MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 15, Problem 2TY
To determine

To describe:The velocity for each year.

Expert Solution & Answer
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Answer to Problem 2TY

The velocity of each year is shown in the following table.

There is a consistent fall in velocity of money during 2006 to 2009, but there is no consistency in trend during 1975 to 1985

Explanation of Solution

The velocity of money indicates how often the overall supply of money circulated in a given period of time in the economy.

Calculation of money's velocity:

Money demand and money supply can be described as follows:

MV=PY....... (1)

M is the money supply

V is the velocity of the money

P is the price level

Y is the total output

MV is the supply of money

PY is the demand for money

Equation (1) can be written as,

  V=PYM.......(2)

Equation (2), PY represents the gross domestic product (GDP)

M represents to money base.

So, the equation can be written as,

  V=GDPM.......(3)

Now, the table represents the money supply and GDP of US for different years.

    YearMoney SupplyGDP
    20061,36713,399
    20071,37514,062
    20081,60214,369
    20091,69714,119

U.S.velocity of money in the year 2006

Substitute the 2006 money supply and GDP in equation (3) to obtain the velocity of money for the U.S. This can be written as,

  V=13,3991,367V=9.8

Therefore, the velocity of money for the U.S.in 2006 was 9.8

U.S.velocity of money in the year 2007

Substitute the 2007 money supply and GDP in equation (3) to obtain the velocity of money for the U.S.This can be written as,

  V=14,0621,375V=10.23

Therefore, the velocity of money for the U.S. in 2007 was 10.23

U.S. velocity of money in the year 2008

Substitute the 2008 money supply and GDP in equation (3) to obtain the velocity of money for the United States. This can be written as,

  V=14,3691,602V=8.97

Therefore, the velocity of money for the United States in 2007 was 8.97

U.S. velocity of money in the year 2009

Substitute the 2009 money supply and GDP in equation (3) to obtain the velocity of money for the U.S. This can be written as,

  V=14,1191,697V=8.32

Therefore, the velocity of money for the United States in 2009 was 8.32

U.S. money supply, GDP and velocity of money for different years is shown in the following tables.

    YearGDPM1 money supplyV=GDPM
    19751,663.70287.15.79
    19761824.1306.25.96
    19772,030.10330.96.14
    19782293.8357.36.42
    19792,562.20381.86.71
    19802,788.10408.56.83
    19813,126.80436.77.16
    19823,253.20521.46.78
    19833,534.60521.46.78
    19843,930.90551.67.13
    19854,217.50619.86.8
    19864,460.10724.76.15
    19874,736.40750.26.31
    19885,100.40786.76.48
    19895,482.10792.96.91
    19905,800.50824.77.03
    19915,992.108976.68
    19926,342.301,024.906.19
    19936,667.401,129.605.9
    19947,085.201,150.606.16
    19957,414.701,127.506.58

Comparing the velocity of money between 1975 to 1985 and 2006 to 2009,

There is a consistent fall in velocity of money during 2006 to 2009, but there is no consistency in trend during 1975 to 1985.

Economics Concept Introduction

Introduction:M1 money supply is the total circulating amount of money and savings with banks and other saving institutions bodies.

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