What direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?

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27-11-2021
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What direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?

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Lanuel Lanuel · Answer 1 · 2021-12-03T02:20:32+01:00

1. A direction of change in velocity that explains an increase in price level by a smaller percentage than the money supply is: A decrease in velocity.

2. An effect of this change in velocity (decrease) with respect to the frequency with which money is exchanged (changes hands) is that: A decline or decrease in velocity simply means that money changes hands less frequently.

What is money?

Money can be defined as a recognized economic unit that is generally accepted by the people as a medium of exchange for goods and services, as well as repayment of debts such as loans and taxes across the world.

Hence, money is a financial asset that is typically used for the purchase of goods and services.

What is the velocity of money?

The velocity of money refers to a measure of the rate at which money is being used by consumers for the purchase of goods and services.

Basically, the velocity of money can be used to achieve the following:

Measure the economic and financial health of a country.

Measure the rate at which money is being exchanged (changes hands).

Measure the circulation of money in an economy.

Mathematically, the velocity of money is calculated by using this formula:

[tex]V = \frac{PY}{M}[/tex]

Where:

P is the price level.

M is the quantity of money.

Y is the level of production or quantity of output.

Generally, an increase in price level by a smaller percentage than the quantity of money supplied represents a decrease in the velocity of money. Also, an effect of a decrease in velocity with respect to the frequency with which money is exchanged (changes hands) simply means that money changes hands less frequently.

In conclusion, the frequency with which money is exchanged (changes hands) should be equal to the quantity of money in an economy multiplied by the average number of times each unit of currency (money) is being spent by the people living in a country.

Read more on the velocity of money here: https://brainly.com/question/9019195