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So he gets those four coins now. These are now gone.

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The farmer doesn't have those anymore. Now the farmer's feeling really great, really optimistic. And then, of course, these are now gone now. The landlord has given them to the farmer. The farmer's feeling really optimistic. He says, landlord, you know what, I'm feel even better than I did before.

Why don't you build me even a few more buildings. I want to expand my house even more.

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But now the landlord's like, man, you've already given me a lot of money, and I already have a lot of work to do. You've got to pay me more if you want me to work overtime, because that's going to take time away from my family and all the rest. And the farmer says, sure. Last time I paid you two gold coins for some buildings.

I'll now pay you three gold coins for the same number of buildings.

Velocity of money - Wikipedia

And so he gives three gold coins. And all he's going to get in return is what he used to get for two gold coins. So if you think about it, the price has gone up for whatever service or product the builder is providing. And then he gives those three gold coins to the landlord and the builder.

Velocity of money

And then the builder says, things are really good. If money supply is decreased but velocity increases, GDP could increase. Show 5 More. Our in-depth tools give millions of people across the globe highly detailed and thoroughly explained answers to their most important financial questions.

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Velocity of Money. What is Velocity of Money? Why does Velocity of Money matter?

Precautionary Balances and the Velocity of Circulation of Money

The velocity of the circulation of money is subject to strong swings. Because the ratio is not stable, the effects of changes in the money supply are not certain. There are no tools to control the velocity. The monetary authorities are not able to foresee how the velocity of money will change.

The trends may be long or short, and when they are long and seem to be stable, they may change abruptly. A reliable calculation of the future trend is not possible even if many data points are available. The long period of the increase of the velocity lasted from the late s until before the trend turned downwards again. An even steeper decline of the velocity took place since the outbreak of the financial crisis in The downturn in the s occurred after the Federal Reserve FED had introduced its new monetary policy.

It turned out that the measures taken were more restrictive than intended. The policymakers at the central bank presumed that the decades-long trend would continue. The U. The deceptive relationship between the money supply and the nominal gross domestic product over the decades before induced the FED to implant a more restrictive monetary policy than was the intent.

What is Velocity of Money ?

The contraction of the velocity of circulation of money explains why the massive increase of the monetary base by the American central bank has not led to a price inflation. Since the crisis of , the Fed has pushed up the monetary base from Yet the price level did not rise as expected.