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Chapter 20: Q 1. (page 546)

How would you expect velocity to typically behave over the course of the business cycle?

Short Answer

Expert verified

The velocity of money is higher during economic growth and lower during a recession.

Step by step solution

01

Step 1. Define the velocity of money

The velocity of money is given by

V=P脳YM,

where V is the velocity, P is the price level, Y is aggregate output, and M is the quantity of money (money supply).

02

Step 2. Explanation

When the economy is experiencing growth, the price level and aggregate output increase, and the money supply M is also likely to be tighter, so the velocity of money is higher. When the economy is in recession, price levels and aggregate output decrease, and the money supply is likely to be increased by the central bank, so the velocity of money is lower.

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Most popular questions from this chapter

What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-run aggregate supply curve? Why?

If the labor force becomes more productive over time, how would the long-run aggregate supply curve be affected?

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