The average frequency with which a unit of money is spent on new goods and services produced in the country during a specific period of time. It indicates the number of times that money changes hands in a year. The demand for money is motivated by its use as a means of payment and wealth accumulation. The quantity theory of money proposes that the monetary mass in circulation, multiplied by the velocity, will be equal to the national income of the country in nominal terms, and that an increase in velocity will cause inflation to increase in the medium term. The velocity of circulation depends on interest rates, inflation, and people’s preferences for holding cash.
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