What does the velocity of money describe in macroeconomic terms?

• A. The rate of money supply growth
• B. The unemployment rate
• C. The rate at which money changes hands in transactions
• D. The price level

Answer: (C)

The velocity of money describes how fast money changes hands in the economy—how many times a unit of currency is used to buy goods and services during a given period. In the simple money framework, it’s the turnover rate that links the money supply to nominal spending: MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. If people spend money more quickly or use it more often for transactions, V rises; if they hold onto cash or there are fewer transactions, V falls. This is why velocity is about the frequency of money changing hands, not about how much money the central bank is creating, the unemployment rate, or the price level itself.