Macroeconomics: Principles and Policy (MindTap Course List)
Macroeconomics: Principles and Policy (MindTap Course List)
13th Edition
ISBN: 9781305280601
Author: William J. Baumol, Alan S. Blinder
Publisher: Cengage Learning
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Chapter 15, Problem 2TY
To determine

To ascertain: The velocity of each year and comparison of trend.

Expert Solution & Answer
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Explanation of Solution

Calculation of velocity of money

According to Fisher's quantity theory of money, the demand for money and supply of money can be written as follows:

  MY=PY   ....... (1)

Where,

M = Money supply

V = Velocity of money

P = General Price level

Y = Total output

MV refers to the supply of money and PY refers to the demand for money.

To calculate the velocity of money, Equation (1) can be written as follows:

  V=PYM   ....... (2)

ln Equation (2), PY refers to gross domestic product (GDP) and M refers to monetary base. Hence, Equation (2) can be written as follows:

  V=GDPM   ....... (3)

United States money supply and GDP The following table shows the money supply and GDP of the United States for different years.

Table (1)

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

United States 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 United States. This can be written as follows:

  V=13,3991,367

  V=9.8

Hence, the velocity of money for the United States in the year 2006 was 9.8

United States velocity of money in the year 2007

Substitute the 2007 money supply and GDP in Equation (3) to obtain velocity of money for the United States. This can be written as follows:

  V=14,0621,375

  V=10.23

Hence, the velocity of money for the United States in the year 2007 was 10.23

United States velocity of money in the year 2008

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

  V=14,3691,602

  V=8.97

Hence, the velocity of money for the United States in the year 2008 was 8.97

United States velocity of money in the year 2009

Substitute the 2009 money supply and GDP in Equation (3) to obtain velocity of money for the United States. This can be written as follows:

  V=14,1191,697

  V=8.32

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

United States money supply, GDP, and velocity of money

The following table shows the United State's money supply, GDP, and velocity of money for different years.

Table (1)

    YearMoney SupplyGDPVelocity
    20061,36713,3999.8
    20071,37514,06210.23
    20081,60214,3698.97
    20091,69714,1198.32

From the above table, it is observed that there is a continuous sharp decreasing trend in velocity of money during 2006 to 2009 except for the year 2007.

United States money supply, GDP, and velocity of money

The following table shows the United State's money supply, GDP, and velocity of money for different years.

Table (2)

    YearGDPM1 Money SupplyV=GDP/M
    19751,663.70287.105.79
    19761,824.10306.205.96
    19772,030.10330.906.14
    19782,293.80357.306.42
    19792,562.20381.806.71
    19802,788.10408.506.83
    19812,126.80436.704.87
    19823,253.20474.806.85
    19833,534.60521.406.78
    19843,930.90551.607.13
    19854,217.50619.806.80
    19864,460.10724.706.15
    19874,736.40750.206.31
    19885,100.40786.706.48
    19895,482.10792.906.91
    19905,800.50824.707.03
    19915,992.10897.006.68
    199263,420.301,024.9061.88
    19936,667.401,129.605.90
    19947,085.201,150.606.16
    19957,414.701,127.506.58

Comparison of velocity of money between 1975 to 1985 and 2006 to 2009

During 2006 to 2009, there is a consistent fall in velocity of money, whereas during 1975 to 1985, the velocity of money shows a mixed trend, that is, there is no consistency in trend.

Economics Concept Introduction

Introduction:

Definition of M1

M1 money refers to the total amount of money in the circulation and savings with banks and other saving institutions.

Velocity of money

Velocity of money refers to how many times the total money supply circulated in the economy in a given period of time.

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