I don't have any economics background, and was going though a course on Macroeconomics. I was solving the practice question here: https://mru.org/practice-questions/causes-inflation-practice-questions?sid=2719557

The last question says:

The velocity of money is affected by which of the following? *

a. How quickly the treasury prints new money.

b. If a consumer makes purchases with large bills or smaller bills.

c. If workers are paid weekly, bi-weekly, or monthly.

d. If a consumer uses a payment plan to purchase something or pays outright.

The answer is c. I cannot understand why does the frequency of payment matters. Also, if c is correct, why is option d wrong?


This is because by definition velocity of money is basically how quickly people spend money they get. Hence any factor that causes people to hold money holder decreases velocity of money and vice versa.

The frequency people get pay might affect how quickly they spend money. For example, if you are paid quarterly basis you will probably be more conservative with your spending to make sure your money lasts for whole quarter (extreme example just to show the point) then if you are paid on monthly basis and you will be even less conservative with your spending if you get paid every week or every day.

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    $\begingroup$ +1 but yeah, there are some extra assumptions baked into that question/answer, which don't make good pedagogy. The (extra) assumptions seem correct but are not trivial. $\endgroup$ – Fizz Apr 10 '20 at 14:56
  • $\begingroup$ @Fizz I don’t disagree on that but honestly from pedagogical perspective some simpler explanation to this kind of high school looking like questions to me seems more appropriate from pedagogical perspective. $\endgroup$ – 1muflon1 Apr 10 '20 at 15:02
  • $\begingroup$ Do you mean it simply boils down to the psychology of people? [italic ](This is because by definition velocity of money is basically how quickly people spend money they get.) True but the amount of spending will also differ correct? Does it matter if some spends 15 dollars twice or 30 dollars in a single go? My assumption is that the requirement of the consumer per unit time remains the same. So the frequency would be more but amount of money spend should be less, thus, making no difference. $\endgroup$ – Grim_Reaper Apr 10 '20 at 15:23
  • $\begingroup$ Also, if we are assuming that people will spend more if they have more money in hand on a frequent basis, why isn't option d correct? $\endgroup$ – Grim_Reaper Apr 10 '20 at 15:23
  • $\begingroup$ @Grim_Reaper it’s not about the quantity of money spend but only about their speed. It’s not necessary about psychology, although it can play role as well you can get the same result with uncertainty even if people are rational under certain assumptions. Velocity is about how much one euro is used in economy - you taking one euro and buying chocolate, the business taking that one euro and paying their wages their employees taking that one euro and buying something with it. $\endgroup$ – 1muflon1 Apr 10 '20 at 15:28

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