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Unformatted text preview: The most important variable that mediates the effects of changes in the money supply is the velocity of money. Imagine that you purchase a hamburger. The waiter then takes the money that you spent and uses it to pay for his dry cleaning. The dry cleaner then takes that money and pays to have his car washed. This process continues until the bill is eventually taken out of circulation. In many cases, bills are not removed from circulation until many decades of service. In the end, a single bill will have facilitated many times its face value in purchases. Velocity of money is defined simply as the rate at which money changes hands. If velocity is high, money is changing hands quickly, and a relatively small money supply can fund a relatively large amount of purchases. On the other hand, if velocity is low, then money is changing hands slowly, and it takes a much larger money supply to fund...
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.
- Fall '10