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- Topic: velocity of money supply
|Author||Topic: velocity of money supply|
|hi! can anyone PLEASE briefly explain why increase in nominal interest rate will increase ms velocity?? i appreciate your help!|
|increse in nominal rates means an increase in inflation. with inflation, less money is chasing higher priced goods. this would in turn increase V.|
|Use quantity theory: V = PY/M, P increases while Y and M don't, so
the velocity increases.
|increase in interest rates means that more money are held in banks to gain the increased interest rates and less money are held in public. This means that the same money are spend more by individuas since we have the same output of products.|
whne P increase, v has to increase in order to hold the identity, keeping other variables constant.
when P increase, inflation rate increase. Given that MS is constant, money turover rate increase, V increase