Chapter 15, Problem 2TY

To determine

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

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:

  $V=\frac{PY}{M}$   ....... (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:

  $V=\frac{GDP}{M}$   ....... (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)

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

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:

  $V=\frac{13,399}{1,367}$

  $V=9.8$

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:

  $V=\frac{14,062}{1,375}$

  $V=10.23$

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:

  $V=\frac{14,369}{1,602}$

  $V=8.97$

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:

  $V=\frac{14,119}{1,697}$

  $V=8.32$

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)

Year	Money Supply	GDP	Velocity
2006	1,367	13,399	9.8
2007	1,375	14,062	10.23
2008	1,602	14,369	8.97
2009	1,697	14,119	8.32

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)

Year	GDP	M1 Money Supply	V=GDP/M
1975	1,663.70	287.10	5.79
1976	1,824.10	306.20	5.96
1977	2,030.10	330.90	6.14
1978	2,293.80	357.30	6.42
1979	2,562.20	381.80	6.71
1980	2,788.10	408.50	6.83
1981	2,126.80	436.70	4.87
1982	3,253.20	474.80	6.85
1983	3,534.60	521.40	6.78
1984	3,930.90	551.60	7.13
1985	4,217.50	619.80	6.80
1986	4,460.10	724.70	6.15
1987	4,736.40	750.20	6.31
1988	5,100.40	786.70	6.48
1989	5,482.10	792.90	6.91
1990	5,800.50	824.70	7.03
1991	5,992.10	897.00	6.68
1992	63,420.30	1,024.90	61.88
1993	6,667.40	1,129.60	5.90
1994	7,085.20	1,150.60	6.16
1995	7,414.70	1,127.50	6.58

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.