Chapter 15, Problem 2TY

To determine

To describe:The velocity for each year.

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,

  $V=\frac{PY}{M}\mathrm{.......}(2)$

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

M represents to money base.

So, the equation can be written as,

  $V=\frac{GDP}{M}\mathrm{.......}(3)$

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

Year	Money Supply	GDP
2006	1,367	13,399
2007	1,375	14,062
2008	1,602	14,369
2009	1,697	14,119

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,

  $\begin{array}{l}V=\frac{13,399}{1,367}\\ V=9.8\end{array}$

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,

  $\begin{array}{l}V=\frac{14,062}{1,375}\\ V=10.23\end{array}$

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,

  $\begin{array}{l}V=\frac{14,369}{1,602}\\ V=8.97\end{array}$

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,

  $\begin{array}{l}V=\frac{14,119}{1,697}\\ V=8.32\end{array}$

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.

Year	GDP	M1 money supply	$V=\frac{GDP}{M}$
1975	1,663.70	287.1	5.79
1976	1824.1	306.2	5.96
1977	2,030.10	330.9	6.14
1978	2293.8	357.3	6.42
1979	2,562.20	381.8	6.71
1980	2,788.10	408.5	6.83
1981	3,126.80	436.7	7.16
1982	3,253.20	521.4	6.78
1983	3,534.60	521.4	6.78
1984	3,930.90	551.6	7.13
1985	4,217.50	619.8	6.8
1986	4,460.10	724.7	6.15
1987	4,736.40	750.2	6.31
1988	5,100.40	786.7	6.48
1989	5,482.10	792.9	6.91
1990	5,800.50	824.7	7.03
1991	5,992.10	897	6.68
1992	6,342.30	1,024.90	6.19
1993	6,667.40	1,129.60	5.9
1994	7,085.20	1,150.60	6.16
1995	7,414.70	1,127.50	6.58

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.