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Velocity of Money
Velocity of Money
Velocity of Money
I
also want to establish that I am not an authority in anyway
regarding this subject. My goal here is to learn. Therefore, I
offer/ask to receive any critical conversation (open source- if
you will) that helps us all gain more information regarding
the intricacies of our financial system.
The Velocity of Money:
Many times when someone posts an article on LinkedIn
regarding the Federal Reserve's potential to increase interest
rates, a LinkedIn member comments regarding the Velocity
of Money (VoM) and how it relates to a potential interest rate
change. While I have a decent understanding of VoM, I
thought it would beneficial to spend more time researching
what is held to be one of the more important economic
statistics.
What is VoM and why does it matter?:
Directly from the St. Louis Fed:
The velocity of money can be calculated as the ratio of nominal gross
domestic product (GDP) to the money supply (V=PQ/M), which can be
used to gauge the economys strength or peoples willingness to spend
money. When there are more transactions being made throughout the
economy, velocity increases, and the economy is likely to expand. The
opposite is also true: Money velocity decreases when fewer
transactions are being made; therefore the economy is likely to shrink