Chapter 1. Section 14(26), Problem 5
Step 1
Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.
Question
Monetarists believed for a period of time that the velocity of money was stable within a country. However, with financial innovation, the velocity began shifting around erratically after 1980. As would be expected, the velocity of money is different across countries depending upon the sophistication of their financial systems velocity of money tends to be higher in countries with developed financial systems. The accompanying table provides money supply and GDP information in 2013 for six countries.
| Country | National Currency | M1 (billions in national currency) | Nominal GDP (billions in national currency) |
|---|---|---|---|
| Egypt | Egyptian pounds | 431 | 1,753 |
| South Korea | Korean won | 515,643 | 1,428,294 |
| Thailand | Thai bhat | 1,608 | 11,898 |
| United States | U.S. dollars | 2,832 | 16,800 |
| Kenya | Kenyan pounds | 967 | 3,797 |
| India | Indian rupees | 19,118 | 113,550 |
Table
Calculate the velocity of money for each of the countries. Round your answers to the nearest tenth.
| Country | M1 (billions in national currency) | Nominal GDP (billions in national currency) | Velocity of money |
|---|---|---|---|
| Egypt | 431 | 1,753 | OvVeWB8hYVw= |
| South Korea | 515,643 | 1,428,294 | 7eeYygbk+gw= |
| Thailand | 1,608 | 11,898 | beZ/hL8o87o= |
| United States | 2,832 | 16,800 | plhyP/7/Dhk= |
| Kenya | 967 | 3,797 | rQp460bmBbk= |
| India | 19,118 | 113,550 | plhyP/7/Dhk= |
Table
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The velocity of money is defined as nominal GDP divided by the quantity of money. For example, the velocity of money in Egypt is 1,753/431 = 4.1. The velocity of money for each of the countries is shown in the accompanying table. For further review see the section, “Monetarism.”
Calculate the velocity of money for each of the countries. Round your answers to the nearest tenth.
Step 2
Question
| Country | Nominal GDP per capita (U.S. dollars) |
|---|---|
| Egypt | 3,225 |
| South Korea | 24,328 |
| Thailand | 5,674 |
| United States | 53,101 |
| Kenya | 1,016 |
| India | 1,504 |
Table
In the table below rank the countries in descending order (1 being the highest and 6 being the lowest) of velocity of money and per capita income.
| Country | Velocity of Money | Per Capita Income |
|---|---|---|
| Egypt | h4XZagboIgc= | h4XZagboIgc= |
| South Korea | yBhAQ+3VvjM= | XvVM00l89Is= |
| Thailand | 0VV1JcqyBrI= | 607M7xmPORU= |
| United States | 607M7xmPORU= | 0VV1JcqyBrI= |
| Kenya | DYU2tVvtzEQ= | yBhAQ+3VvjM= |
| India | XvVM00l89Is= | DYU2tVvtzEQ= |
Table
Rank in descending order of velocity: Thailand, India, United States, Egypt, Kenya, South Korea. Rank in descending order of per capita income: United States, South Korea, Thailand, Egypt, India, Kenya. According to the above rankings, wealthy countries, with the exception of South Korea, tend to have a higher velocity of money than do poor countries, but the relationship is not exact. Prior to the financial crisis, South Korea had a much higher velocity of money. Since the crisis, South Korea saw their money supply increase from 77,274 billion won to 515,643 billion won. Prior to the financial crisis in 2007, South Korea had a velocity of money greater than 10. One would expect wealthy countries to have more sophisticated financial systems.For further review see the section, “Monetarism.”
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