The Role of Velocity in Monetary Policy
The first prominent view on the role of money in the economy was Fisher’s1 formulation of the quantity theory of money, explained in Chapter 1 and presented in equation 1.1, which is repeated here for reference.
MV = PQ(4.1)
where V is the velocity of money (M), which is assumed to be fairly stable over time for a given economy, P is the price level or average prices, and Q is the output of the economy, in a closed economy. At least as early as the 18th century, economists realized that the value of transactions in an economy far exceeds the physical supply of money, which, until 1971, was mostly metal based in some fashion. The only logical explanation for this possibility is that money changes ...
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