Philipji.com

19 June 2011

The income velocity of money (which I shall hereafter refer to as the velocity of money) is calculated by dividing a measure of income, say GDP, by a measure of money, say M1.

In a speech on June 11, 2011, Economics instruction and the brave new world of monetary policy, John C. Williams, president of the San Francisco Federal Reserve Bank, said: "Let's take a closer look at the classic quantity theory of money: MV = PY. It becomes very tenuous when traditional measures of M make up a smaller and smaller fraction of the value of transactions. For example, the velocity of M1 was around three or four in the 1950s. Now it is about eight -- and that's down from a peak of about 10-1/2 a few years ago. Today's economy uses cash and checking accounts much more efficiently."

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Category: Economics

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