Explore BrainMass
Share

Explore BrainMass

    Velocity of money

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    What basic assumption about the velocity of money transforms the equation of exchange into the quantity theory of money?

    Also: According to the quantity theory, what will happen to nominal income if the money supply increases by 5 percent and velocity does not change?

    What will happen to nominal income if, instead, the money supply decreases by 8 percent and velocity does not change?

    What will happen to nominal income if, instead, the money supply increases by 5 percent and velocity decreases by 5 percent?

    What happens to the price level in the short run in each of these three situations?

    © BrainMass Inc. brainmass.com October 9, 2019, 5:30 pm ad1c9bdddf
    https://brainmass.com/economics/price-levels/velocity-of-money-59238

    Solution Preview

    The theory is built on the Fisher equation, MV = PT propounded by the economist Fisher.

    M is the stock of money, V is the VELOCITY OF CIRCULATION, P is the average PRICE level and T is the number of transactions in the economy.
    The equation states that the quantity of money spent equals the quantity of money used.
    The theory says that the quantity of MONEY available in an economy determines the value of money. Increases in the MONEY SUPPLY are the main cause of ...

    Solution Summary

    This explains the cocept of velocity of money

    $2.19