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If Bob and Jane do the same two transactions every month, their ' GDP ' will be $2,400 per year, though the money supply is only $100. The equation for GDP is: GDP = Money Supply x Velocity of Money. To solve for velocity in our example, we rearrange the equation to get Velocity = GDP / Money Supply, or ($2,400 / $100).
The quantity theory of money (sometimes called QTM) says that prices rise when there is more money in an economy and they fall when there is less money in an economy. The following formula expresses the theory: M x V = P x T. Where M = the money supply. V = the velocity of money. P = average prices. T = number of transactions in the economy.
When people spend less and save more, the velocity of money falls and drags down economic growth. Through quantitative easing, the Federal Reserve will try to counteract falling velocity by increasing the money supply. It has two primary tools with which to do it. The first way the Fed manages money supply is via the federal funds rate. Banks ...
Velocity is the speed at which money passes through the hands of one person or company to another. When money is spent quickly, it encourages growth in GDP. When money is saved and not spent, the GDP of the country slows. Through quantitative easing, the Federal Reserve tries to counteract falling velocity by increasing the money supply.
Vladimir Lenin. Volatility Index (VIX) Volume. Voodoo Accounting. Voodoo Economics. Voting Shares. Vulture Fund. InvestingAnswers' glossary of financial definitions and business terms that begin with the letter "V".
In consumer behavior, price sensitivity (also called the elasticity of demand) is the degree to which price affects the sales of a product or service. Thus, the formula for price sensitivity is: Price Sensitivity = % Change in Quantity Purchased/% Change in Price. In the bond world, duration is a measure of a bond’s price sensitivity to ...
The most famous equation in economics is MV = PQ. This means that the supply of money (M) times how fast that money is spent (velocity or V) is equal to the price level of money, most commonly thought of as inflation (P in the formula) times the GDP (Q). There are economic indicators which allow investors to monitor each of those key variables.
The market for U.S. Treasury instruments is a very important factor in determining market conditions. These instruments are seen as virtually risk-free, since investors assume a United States debt default is highly unlikely. The interest rates on Treasury debt sets the baseline risk-free rate that almost all other interest rates (corporate bond ...
Standard deviation is a measure of how much an investment's returns can vary from its average return. It is a measure of volatility and, in turn, risk. Finding out the standard deviation as a measure of risk can show investors the historical volatility of investments. The higher the standard deviation, the more volatile or risky an investment ...
As a quick example of how call options make money, let's say IBM (NYSE: IBM) stock is currently trading at $100 per share. Now let's say an investor purchases one call option contract on IBM at a price of $2 per contract. Note: Because each options contract represents an interest in 100 underlying shares of stock, the actual cost of this option ...