Chapter 19, Problem 1Q

To determine

The way in which velocity is expected to behave over the course of business cycle.

Explanation of Solution

During the times of expansions, supply of money will be less expansionary and nominal GDP will rise, which typically results in increase in velocity.

In times of recession, since nominal GDP falls, it results in expansionary monetary policy, which will increase the money supply and results in declining of velocity during recession.

Money supply is increased in the economy because of the expansionary monetary policy with an equal increase in GDP. This increased money supply increases the velocity of money and in times of recession, the money supply in the economy decreases with the equal decrease in the GDP, which results in the decline of the velocity of the money.

Economics Concept Introduction

Introduction: Velocity is the rate at which money is exchanged between different transactions. Velocity of money also refers to the number of times currency is used during a given period.Business cycle is the fluctuation of gross domestic product (GDP) towards its long-term growth trend.