Question

Using data from the Economic Report of the President, calculate velocity for the M2 definition of the money supply in the past five years. Does velocity appear to be constant?

Answer 1

$\frac{M2}{ H} = \frac{(C + D)}{ (C + R)}=\frac{ (\frac{C}{D} + 1)}{(\frac{C}{D} + \frac{R}{D})}$

where M2 is the money supply in circulation;

H is the monetary base;

C - cash;

D - deposits;

R - required reserves of commercial banks.