23 Jul 2012 by Gottfried Leibbrandt

How fast is that buck?

In this chapter we ask a simple question; How often does a dollar bill change hands? This quantity, known as the velocity of money, is relevant because it influences inflation: higher velocity of money has the same effect as an increase in the quantity of money; if money works harder, you need less of it. The Federal Reserve estimates that physical currency turns over 55 times per year, i.e. about once a week. The denomination of cash, however, plays a role here with $1 and $5 notes changing hands much more frequently than higher denomination notes. Referring back to chapter 3, this is not the case for the underground economy, where money changes hands much less frequently.

Download chapter 4, How fast is that buck?, here.

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