Velocity

1
Velocity Real Income

• More Realism

2
Rising Real Income

• Increases in capital stocks
• Increases in population
• Increases in other factors of production
• Rising productivity

3
More Goods

• More goods services coming into markets
• Means more money must be spent to buy them
• If V is slow to adapt, M must be expanded
• Otherwise?

4
Recessions

• Output shrinking gt fewer goods and services, or
  at least a slowing growth rate, coming into
  markets
• Again, if V is slow to adapt, the rate of growth
  of M can be slowed

5
Monetary Policy in Action

• The central bank must be able to predict the
  cycles of y to adapt the money supply growth rate
• M/y is a vital indicator
• The task is impossible, but an approximation
  sometimes works

6
How Constant is V?

• Assume inflation is 60
• If V 6, as before, dollars sit 2 months between
  uses
• At the end of 2 months, the dollars have lost 10
  of their purchasing power.
• Do dollars really sit for 2 months?

7
Expected Inflation

• The operative variable is not inflation as
  measured, but inflation as expected by the public
• Can that be measured?
• No, but it can be estimated
• It is a powerful operator

8
Expectations

• What do you think happens to V if most people
  believe inflation is coming or getting worse?
• OK, but why would so many people suddenly believe
  that?
• This doesnt just happen

9
Source of Inflation?

• Remember what causes inflation
• People are smart about their money
• Professor Inflation
• Rational expectations