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Chapter 20: Q 1. (page 546)

How would you expect velocity to typically behave over the course of the business cycle?

Short Answer

Expert verified

The velocity of money is higher during economic growth and lower during a recession.

Step by step solution

01

Step 1. Define the velocity of money

The velocity of money is given by

V=P×YM,

where V is the velocity, P is the price level, Y is aggregate output, and M is the quantity of money (money supply).

02

Step 2. Explanation

When the economy is experiencing growth, the price level and aggregate output increase, and the money supply M is also likely to be tighter, so the velocity of money is higher. When the economy is in recession, price levels and aggregate output decrease, and the money supply is likely to be increased by the central bank, so the velocity of money is lower.

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Most popular questions from this chapter

Calculate what happens to nominal GDP if velocity remains constant at 4and the money supply increases from \(250billion to\)375 billion.

What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances? On the basis of these motives, what variables did he think determined the demand for money?

Suppose the liquidity preference function is given by

Li,Y=Y8-1,000i

Use the money demand equation, along with the following table of values, to calculate the velocity for each period.

Suppose a given country experienced low and stable inflation rates for quite some time, but then inflation picked up and over the past decade had been relatively high and quite unpredictable. Explain how this new inflationary environment would affect the demand for money according to portfolio theories of money demand. What would happen if the government decided to issue inflation-protected securities?

Why is Keynes’s analysis of the speculative demand for money important to his view that velocity will undergo substantial fluctuations and thus cannot be treated as constant?
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