# 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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