Velocity of money.
In plain English
Velocity is not something anyone counts directly; it is derived by dividing nominal gross domestic product by a measure of the money supply. A high number means the same stock of money supports a lot of transactions. A low number means money is sitting still, in deposits or reserves rather than moving through purchases. Because velocity can change, an increase in the money supply does not translate one-for-one into higher prices or output. Different money measures produce different velocity figures, so the definition used matters.
01Why it matters
Velocity is why a large increase in the money supply can arrive without matching inflation: if the new money sits still, it does not bid up prices.
02The math, step by step
Say nominal output is $2,000 billion and the money supply measure is $800 billion. Velocity is 2,000 divided by 800, or 2.5. Each dollar was involved in transactions two and a half times over the year, on average.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It has nothing to do with how quickly a payment settles. Velocity is an accounting ratio of output to money, not a measure of payment technology. Instant payments do not raise velocity on their own; more spending relative to the money stock does.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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