Question

1. Define velocity of money and discuss the major determinants of velocity.

2. Assume GDP is currently $8,376 billion per year and the quantity of money is $698 billion. What is the velocity of money? The nation collectively holds enough money to finance how many days worth of GDP expenditure?

3. If bank A borrows $10 million from bank B, what happens to the reserves in bank A? In the banking system? Please explain.

4. If bank A borrows $10 million from the Fed, what happens to reserves in bank A?. In the banking system? Please explain.

Answer 1

Answer:- Velocity of money can be seen as the exchange rate of the money from one transaction to other. It can also be seen as the extent to which a unit of currency is utilized in a specific period of time. In most simple words, velocity of money is the utilization of money by the individuals.

Different factors which can affect the velocity of money are as below:-

Money supply, Value of money, credit facilities, level and volume of trade, business environment, number of transactions, payment system, regulatory system, propensity to consume.

Answer:- Velocity = GDP / Money Supply,

In the question, GDP=$8,376 billion

Money Supply =$698 billion

Velocity of money=$8,376 billion /$698 billion

Velocity of money= 12

Answer:- If bank A borrows $10 million from bank B, then reserves in bank A will increase and there will be no effect on the banking system as money is transferred from Bank B to Bank A.

Answer:- If bank A borrows $10 million from the Fed, then reserves in bank A will increase . This will also increase the reserve of banking system as this transaction will not offset the transaction of any other bank.