Wize University Macroeconomics Textbook > Money and Prices in the Long Run

Velocity of Money

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Velocity of Money

The Velocity of money (V) is the rate at which money changes hands. It is equal to nominal GDP divided by the quantity of money.


V= P∗Y M\boxed{\text{V} =\ \frac{P *Y}{\ M}}

Where:

V - Velocity of money

P - Price level

Y - Real output (GDP) P * Y - Nominal GDP

M - Quantity of money (or money supply)


Example: If the price of each pizza is $10 and there are 100 pizzas made (consumed) and the quantity of money in the economy is $50, then the velocity of money = ________. This means each dollar has to change hands on average 20 times per year.


  • Quantity Equation - the equation that relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services (nominal GDP).


M * V = P * Y \boxed{\text{M * V = P * Y }}


  • The velocity of money is relatively stable. If the central bank increases the quantity of money it causes the price level and inflation to ________