0
$\begingroup$

According to Pablo Kurlat's textbook on Macroeconomics, the graph of Ch 13 compares the velocity of M1 and M2 over the years. I don't understand why M1 velocity exceeds M2 even though M2 includes more variables such as M1+ money market mutual funds + time deposits + savings deposits. I thought M2 velocity would exceed M1 velocity. I also understand that according to the Quantity equation: money supply * velocity = price level * real GDP enter image description here

$\endgroup$
1
$\begingroup$

You may be confusing money velocity with money supply. From Wikipedia, the velocity of money is "measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period." There is indeed more M2 than M1 but the velocity of M1 is often higher than that of M2. The shared portion of M1 and M2 will have the same velocity: this is the same thing as saying the velocity of M1 is the same as the velocity of M1. However, the portion unique to M2 will have a lower velocity: for example, saving deposits are usually moved around less than credit in demand deposits (checking accounts). Hence, overall M2 will often have a lower velocity than M1.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.