Question

How would you expect velocity to typically behave over the course of the business cycle?

Short answer

The velocity of money is higher during economic growth and lower during a recession.

Step-by-step solution

Step 1. Define the velocity of money

The velocity of money is given by

$V=\frac{P\times Y}{M}$,

where V is the velocity, P is the price level, Y is aggregate output, and M is the quantity of money (money supply).

Step 2. Explanation

When the economy is experiencing growth, the price level and aggregate output increase, and the money supply M is also likely to be tighter, so the velocity of money is higher. When the economy is in recession, price levels and aggregate output decrease, and the money supply is likely to be increased by the central bank, so the velocity of money is lower.