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,
Equation (2), PY represents the
M represents to money base.
So, the equation can be written as,
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,
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,
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,
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,
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 | |
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.
Introduction:M1 money supply is the total circulating amount of money and savings with banks and other saving institutions bodies.
Want to see more full solutions like this?
Chapter 15 Solutions
Mindtap For Baumol/blinder/solow's Macroeconomics: Principles & Policy, 1 Term Printed Access
- How would a doubling of velocity affect Real and Nominal GDP, assuming the money supply doesn’t changearrow_forwardWhich of the following statements about the income velocity of money (V) is NOT correct? a. It is an indicator of the demand for money as an asset (store of wealth). b. It is equal to the ratio of GDP to some measure of the stock of money such as M2. c. It is influenced by the public expectations regarding future rates of inflation. d. none of the above.arrow_forwardFor the purpose of this exercise, assume that velocity is stable. If the Fed wants to keep inflation growing at about 2%, and the economy grew at about 6% during Q1 of 2021, then what would the growth in the money supply need to be in order for the Fed to hit its inflation target? And what does the substantially higher rate of money growth say about the likelihood of future inflation?arrow_forward
- Assuming that the aggregate supply in a given economy increases by 7.5 percent, whereas the velocity of circulation of money is fixed. If the targeted rate of inflation in the economy is 9.8, estimate what should be the percentage money supply, given that inflation is only a monetary phenomenon.arrow_forwardWhat is velocity of money? List two major determinants of velocity of money.arrow_forwardGiven that velocity is 4, real GDP is 8, and the price level is 2. Suppose that the Central Bank decides to increase nominal money supply to 6 while velocity remains unchanged, calculate the percentage change in nominal GDP.arrow_forward
- . Based on your knowledge of the Quantity Theory of Money and the Equation of Exchange, answer the following questions. Assume the money supply is $1,200 billion, the velocity of circulation is 8, and the price level is $6. What is the level of real output and nominal output? Assume the money supply is $1,200 billion, the price level is $6, and velocity remains constant. What will happen if the money supply rises by 10%?arrow_forwardBetween 1950 and 1975, the average annual rate of change in the money supply was slightly less than 4 percent. Has the Fed expanded the money supply more (or less) rapidly than this 4 percent long-term rate during the past 12 months? The past 24 months? Is the Fed's current monetary policy restrictive or expansionary? Explain.arrow_forwardWhich of the following is correct?. (a) velocity is the rate at which money circulates(b) velocity equals 2 if transactions are $2M and money supply is $1M (c) velocity is 5 if the share that people want to hold of their income k = 20% (d) all of the above (e) none of the abovearrow_forward
- In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “soft patch” in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary. a. How might fears of a zero lower bound justify such a policy, even if the economy was not actually in a recession? b. Show the impact of these policies on the MP curve and the AD/AS graph. Be sure to show the initial conditions in 2003 and the impact of the policy on the deflation threat.arrow_forwardWhat is the effect on velocity if Congress outlaws the use of credit cards?arrow_forwardBecause inflation targeting focuses on achieving theinflation target, it will lead to excessive output fluctuations.” Is this statement true, false, or uncertain? Explain.arrow_forward
- Macroeconomics: Principles and Policy (MindTap Co...EconomicsISBN:9781305280601Author:William J. Baumol, Alan S. BlinderPublisher:Cengage Learning