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The velocity of money provides another perspective on money demand.Given the nominal flow of transactions using money, if the interest rate on alternative financial assets is high, people will not want to hold much money relative to the quantity of their transactions—they try to exchange it fast for goods or other financial assets, and money is said to "burn a hole in their pocket" and ...
The theory is often stated in terms of the equation M V = P Y, where M is the money supply, V is the velocity of money, and P Y is the nominal value of output or nominal GDP (P itself being a price index and Y the amount of real output).
The quantity theory of money adds assumptions about the money supply, the price level, and the effect of interest rates on velocity to create a theory about the causes of inflation and the effects of monetary policy.
Monetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions ( as medium of exchange, store of value, and unit of account), and it considers how money can gain acceptance purely because of its convenience as a public good. [1]
The period when major central banks focused on targeting the growth of money supply, reflecting monetarist theory, lasted only for a few years, in the US from 1979 to 1982. [ 16 ] The money supply is useful as a policy target only if the relationship between money and nominal GDP, and therefore inflation, is stable and predictable.
The most basic "classical" transaction motive can be illustrated with reference to the Quantity Theory of Money. [1] According to the equation of exchange MV = PY, where M is the stock of money, V is its velocity (how many times a unit of money turns over during a period of time), P is the price level and Y is real income.
In the same work, Copernicus also formulated an early version of the quantity theory of money, [2] or the relation between a stock of money, its velocity, its price level, and the output of an economy. Like many later classical economists of the 18th and 19th centuries, he focused on the connection between increased money supply and inflation. [6]
The Cambridge equation formally represents the Cambridge cash-balance theory, an alternative approach to the classical quantity theory of money. Both quantity theories, Cambridge and classical, attempt to express a relationship among the amount of goods produced , the price level , amounts of money, and how money moves.