VELOCITY - VELOCITY VELOCITY is a measure of how many time...

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VELOCITY VELOCITY is a measure of how many time the average dollar changes hands. Here is an example of what would be personal velocity. Suppose that your income = $24,000 paid in 12 monthly checks of $2000 each. Suppose that you spend the $2000 over the course of the month. Suppose that you always keep a $500 minimum balance. Therefore, on pay day, your checking account balance would be $500 + $2000=$2500. On the last day of the pay period, your checking account balance would be $500. Your average cash balance would be $1500. To put this in the symbols of the quantity theory, your PY = $24,000 your M = $1500 So V= PY/M = 24000/1500 = 16 Now suppose the frequency with which you get paid increases to twice a month rather than once a month. Your income is still $24,000. Your minimum balance is still $500. Now you are getting paid twice a month, so each check is for $1000. On pay day, you have $500 + $1000 = $1500. On the last day of the pay period, you have $500.
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This note was uploaded on 03/18/2008 for the course ECON 304L taught by Professor Staff during the Spring '07 term at University of Texas.

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