# Velocity of money

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?

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#### 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