Definition
Velocity of Money
The velocity of money is how many times a unit of currency is spent on goods and services in a given period; higher velocity means money circulates faster through the economy.
If the total money supply is ₹100 lakh crore and annual GDP is ₹300 lakh crore, each rupee changed hands three times, giving a velocity of 3. It connects money supply to nominal output in the quantity theory.
Velocity falls when people hoard cash or save more (as during uncertainty) and rises when confidence and spending pick up. A drop in velocity can blunt the inflationary impact of money-supply growth, complicating the simple link between money printing and prices.
Related terms
- MonetarismMonetarism, associated with Milton Friedman, holds that the money supply is the primary driver of inflation and economic activity, and that steady money growth is the best policy.
- Quantity Theory of MoneyThe quantity theory of money states that the general price level is proportional to the money supply, captured in the equation MV = PT (money times velocity equals price times transactions).
- Money Supply (M0 to M3)Money supply measures the total money in an economy, classified into M0, M1, M2 and M3 by liquidity, from physical cash to broader deposits.
- InflationInflation is the rate at which the general level of prices rises over time, steadily eroding the purchasing power of money and the real value of savings.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.