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What is the velocity of money if the nominal interest rate is constant?
Wiki User
∙ 13y ago
If the nominal interest rate is constant, then PY is constant in the equation PY = MV, so V will remain constant so long as money supply does not change.
Wiki User
∙ 13y ago
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Opportunity cost of holding money?
The opportunity cost of holding money is the nominal interest rate.
4 The Internet accelerates the process of economic growth Discuss?
Using the formula MV=PQ, and understanding that PQ is just nominal GDP for a nation, explains this. The Internet accelerates the velocity of money, since money can be transferred more easily electronically. Therefore, assuming M is constant, an increase in V leads to an increase in nominal GDP.
In which situations is it certain that the quantity of money demand by the public will decrease?
nominal GDP decreases and the interest rate decreases
How do calculate velocity of money?
The money velocity is the average number of times a unit of money is used in a specific period of time. For example, you could say the annual money velocity of a US dollar bill is 3 (any dollar bill, on average, was used three times this year). Money velocity can be calculated using a specific formula: V = ( P * Q ) / M ; V = Money velocity, P = aggregate Price level, Q = aggregate quantity of goods and services, and M = total amount of money (money supply). The formula can also be rewritten like so: M * V = P * Q; where P * Q equals the nominal GDP.
If the Federal Reserve increases the reserve requirement and velocity remains stable What will happen to nominal GDP and why?
A significant increase in reserve requirements will reduce the lending of member banks resulting in a relatively smaller supply of M2 money. Money can bought and sold repeatedly by each stock speculator throughout the day. Just look at the volume netted and cleared by stock speculators on a daily basis. Therefore velocity has no obvious unambiguous meaning outside of something like nominal GDP divided by money supply. Therefore by this definition a decrease in money supply must be countered with a decrease in GDP to keep velocity stable.
Opportunity cost of holding money?
The opportunity cost of holding money is the nominal interest rate.
4 The Internet accelerates the process of economic growth Discuss?
Using the formula MV=PQ, and understanding that PQ is just nominal GDP for a nation, explains this. The Internet accelerates the velocity of money, since money can be transferred more easily electronically. Therefore, assuming M is constant, an increase in V leads to an increase in nominal GDP.
In which situations is it certain that the quantity of money demand by the public will decrease?
nominal GDP decreases and the interest rate decreases
The annual nominal rate of interest on a bank certificate of deposit is 12 percent what would be the effect of an inflation rate of 13 percent?
The 12 percent nominal interest means that your money will increase in value by 12% in a year's time in NOMINAL terms.However, the inflation rate of 13 percent says that the cost of goods will increase faster than the value of your deposit.Hence the REAL effect is that the value of your money will fall by 1 percent.
Calculate the velocity of money when nominal gross domestic product GDP is 1 trillion and the money supply is 250 billion?
Gross Domestic Product divided by the value of the money supply 1,000,000,000,000 divided by 250,000,000,000 = 4.
How do calculate velocity of money?
The money velocity is the average number of times a unit of money is used in a specific period of time. For example, you could say the annual money velocity of a US dollar bill is 3 (any dollar bill, on average, was used three times this year). Money velocity can be calculated using a specific formula: V = ( P * Q ) / M ; V = Money velocity, P = aggregate Price level, Q = aggregate quantity of goods and services, and M = total amount of money (money supply). The formula can also be rewritten like so: M * V = P * Q; where P * Q equals the nominal GDP.
What does a lower interest rate mean for savers?
It means that they are getting less money for deferring expenditure and saving instead. However, it is not the low nominal interest rates which matter but what the "real" interest rates are. This is the difference between the nominal interest rate and the rate of inflation. An interest rate of 2% when inflation is 0% is good news for savers but an inflation rate even as high as 10% is bad news if inflation is higher than 10%.
If the Federal Reserve increases the reserve requirement and velocity remains stable What will happen to nominal GDP and why?
A significant increase in reserve requirements will reduce the lending of member banks resulting in a relatively smaller supply of M2 money. Money can bought and sold repeatedly by each stock speculator throughout the day. Just look at the volume netted and cleared by stock speculators on a daily basis. Therefore velocity has no obvious unambiguous meaning outside of something like nominal GDP divided by money supply. Therefore by this definition a decrease in money supply must be countered with a decrease in GDP to keep velocity stable.
How circulation of money is develop?
Quantity Theory of Money (1885)Developed by the Americans SIMON NEWCOMB (1835-1909) and Irving Fisher (1867-1947), the latter of whom's original equation stated in simple terms that the amount of money in circulation equals money national income; that is,MV = PTwhere M is money stock, V is velocity of circulation, P is average price level and T the number of transactions. The equation assumes that the velocity of circulation of money is stable (at least in the short term) and that transactions are fixed by consumer tastes and the behavior of firms.Quantity theory of money was superseded by Keynesian analysis. Members of the Cambridge School were concerned with the volume of money held given the number of transactions carried out. They argued that the greater the number of transactions, the greater the amount of money held. English economist Arthur Cecil Pigou (1877-1959), in particular, asserted that the nominal demand for money was a constant percentage of nominal income.In the Cambridge Equation, PT is replaced by Y (the income velocity of circulation). The equation is:V = Y / Mwhere M is money stock in economy, Y income velocity of circulation and V average velocity of circulation.Monetarists argue that an increase in prices would not lead to inflation unless the government increased the money supply.
How are interest rates calculated?
Calculating Interest: Principal, Rate and Time are Known--I= p r t http://www.calculator.net/interest-rate-calculator.html The level of interest rates in a free market economy are primarily determined by the rate of inflation, the demand for money, and the actions of the Federal Reserve. Lenders of money will generally demand what is known as a nominal interest rate which is equal to a real interest rate plus a premium to cover the inflation rate. The real, or inflation adjusted interest rate, is the percentage rate of return to a lender as measured by an increase in purchasing power. Yale professor Irving Fisher's economic theory of interest rates laid the conceptual groundwork for establishing that the nominal interest rate equals the real interest rate plus the anticipated rate of inflation. Fisher's mathematical equations in his theory of interest rates are supported by empirical data. A comparison of comparable maturity U.S. Treasury securities, one of which has a fixed rate and the other an inflation adjusted rate, shows that the nominal interest rate always exceeds the real interest rate. A consumer, whether a borrower or a saver, will generally be quoted a nominal interest rate by a bank on a loan or a savings account.
Why does aggregate demand go up when money supply increases?
It doesn't. Money supply has no effect on aggregate demand. Aggregate demand is only effected by the buying power of money, real interest rate, and the real prices of exports and imports. If the supply of money goes up it only causes a short term decrease in the nominal interest rate. The price level is not accompanied by a decrease in the supply of money so the real interest rate does not rise.
What is are the differences between Friedman's quantity theory of money and that of Irving fisher's?
Friedman's quantity theory of money focuses on long-run changes in money supply and its relationship with nominal income. Fisher's quantity theory expands on this to account for both short-run and long-run changes in money supply and velocity of money. Fisher also incorporates the concept of the equation of exchange to explain the relationship between money supply, velocity, price level, and real income.
