International Economics 10th Edition by Paul Krugman,Maurice Obstfeld ,Marc Melitz

Exercise 3

The velocity of money, V , is defined as the ratio of real GNP to real money holdings, V = Y /( M / P ) in this chapter's notation. Use equation to derive an expression for velocity and explain how velocity varies with changes in R and in Y. (Hint: The effect of output changes on V depends on the elasticity of aggregate money demand with respect to real output, which economists believe to be less than unity.) What is the relationship between velocity and the exchange rate?