Velocity of Money

Let **M** be the nominal stock of money, let **P** be the nominal price
level, and let **Y** be the flow of real transactions (often proxied by real
GDP). The equation of exchange

**MV = PY**,

where **V** is the velocity of money, always holds because the velocity of
money is not directly observable. In other words, the equation can be
rearranged to make it clear that it is simply the definition of velocity:

**V = PY / M**.

This math can be turned into a theory of the demand for money if the velocity is taken to be a behavioral outcome determined as a function of certain variables such as real transactions and the interest rate.

The former interpretation as an accounting identity is found in the Classical Model. The latter interpretation is found in the Keynesian IS/LM Model.

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