VELOCITY >>>> SPEED SPeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeD (HOW FAST?)

VELOCITY OF MONEY Investigating the velocity of money and the money multiplier

DEFINITION is a measure of the economic activity of a nation. It looks at how many times a unit of currency ($1 in the case of the United States) flows through the economy and is used by the various members of a society.

MEANING: All else equal, the faster money travels (the higher the velocity of money) the more transactions in which it is used - the healthier the economy, - the richer the citizens, and - the more vibrant the financial system.

THE VELOCITY OF MONEY TELLS YOU HOW EFFICIENT $1 OF MONEY SUPPLY IS AT CREATING ECONOMIC ACTIVITY. So:

FORMULA V x M = P x Y V = VELOCITY M= MONEY SUPPLY P= PRICE OF GOODS PRODUCED Y = QUANTITY OF GOODS PRODUCED (REAL GDP)

FORMULA VELOCITY OF MONEY CAN BE EXPRESSED AS:

REMEMBER! VELOCITY OF MONEY = How fast money flows through the economy

FACTORS AFFECTING VELOCITY 1)Lower income groups? 2)Good economy (booming period) ? 3)If more people use loans to buy? 4)If more people save money? 5)Developed countries Think!

Factors affecting Velocity of money circulation Income distribution. Poor people immediately use their money. so, money in the hands of poor=> has higher velocity. Booming period = higher velocity If More people use loans for purchase=> higher velocity If more people save > Lower velocity Developed countries => higher velocity, because people save less and spend more because of lifestyle and confidence in Government social- security e.g. USA

TASK COMPLETE THE TASK …. on the worksheet provided on the Velocity of money

MONEY MULTIPLIER

Is the increase of a country’s money supply that results from banks being able to loan money (give credit)

AN EXAMPLE Reserve ratio = 20%

BANK’S BALANCE SHEET * ‘.

BANKS BALANCE SHEET EXPLAINED ASSETS A loan made by the bank is recorded as an asset; once you’ve lent money, you no longer have the money, so how can you record it as an asset ?

BANK’S BALANCE SHEET EXPLAINED LIABILITIES money’ in your bank account does not represent money in the bank’s safe, A bank’s liabilities are made up of ‘DEPOSITS’ which are owed to the ‘depositors’ individuals, businesses or central bank

FORMULA Money Multiplier = 1/(Reserve Requirement)

REMEMBER You need to divide the initial deposit by the reserve requirement = to get the amount of money of money created R

TASK …….. See worksheet Explain the MULTIPLIE R EFFECT in relation to the balance sheet provided

A hahah moment

GOT IT??? GOOD !