Free Sample Essay on the Velocity of Money

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In order to estimate total supply NF money over a period of time, say, a year or so, the concept of velocity of money is necessary. Total supply of money over a period of time is equal to the total amount of money in circulation multiplied by its velocity of circulation during that period.

If stands for total amount of money in a given period of time, then the total supply of money during period of time is indicated by MV. While M gives the money supply at a particular moment of time, MV gives a measure of money supply over a period of time.

Velocity of money refers to the average number of times a unit of money changes hands or is transferred from one person to another during a given period of time.

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Total money supply is affected by the velocity of money; an increase in the velocity of money increases the money supply and a decrease in velocity of money decreases the money supply, other things remaining the same. Velocity of money is related not only to metallic or paper money.

Credit money also has its velocity of circulation. The quantity theory of money maintains that the velocity of money might change significantly in the short period, it is relatively stable in the long period because in the long run it is related to the institutional structure of the economy’s payment system.

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