Velocity is
A)Y/(M x P)and increases if dollars are exchanged less frequently.
B)Y/(M x P)and increases if dollars are exchanged more frequently.
C)(P x Y)/M and increases if dollars are exchanged less frequently.
D)(P x Y)/M and increases if dollars are exchanged more frequently.

Question

Quizplus · Accepted Answer

Velocity is defined as the ratio of nominal GDP (PY) to the money supply (M). Therefore, option D, (PY)/M is the correct formula for velocity. Moreover, as the equation indicates, velocity increases when either the price level (P) or the real output (Y) of an economy is constant and the money supply (M) decreases, or when P or Y increases and M is constant. Hence, velocity increases if dollars are exchanged more frequently.

Velocity Is