The \"velocity of money,\" denoted V, refers to the rate at which money changes

Question

The "velocity of money," denoted V, refers to the rate at which money changes hands in an economy. In this experiment, we can think of the velocity of money as the fraction of the money supply that changes hands each week. For example, if the money supply is 8,000 yen, and in a particular week 1,600 yen change hands, then we can say that the velocity of money in that week is 1,600 / 8,000 = 0.2. The velocity of money is a good way of thinking about the relationship of the money supply to economic activity. Let's think about the velocity of money in the case of potential output: that is, when all the Hermetians with 20 grams of goo on their plot hire the other half as assistants.

3.1. Recall that each Hermetian was initially given 200 yen. Suppose the average price of labor is 100 yen -- that is, 50% of average money holdings. Then if the economy were operating at potential output, the velocity of money would be:

A. 0.4

B. 0.2

C. 0.25

D. 1

Explanation / Answer

The velocity of money= C) 0.25

Because , Velocity= 50 / 200 = 0.25

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