Research (ČP INVEST)
Macroeconomics  |  June 19, 2012 14:43:31

More money does not mean more economic activity

A tripling of the money supply in the U.S. hardly reflected in an increase in economic activity. Therefore, its GDP remains almost unchanged.

The graph shows the velocity evolution of monetary aggregates M1 and M2 in the U.S. economy since 1960. The latter variable can be defined as the frequency with which the unit of moneyspent on new goods and services produced domestically within a certain time period (usually one year), so many times in one year will change monetary unit (dollar) of its owner.   Speed ??has to do with a lot of economic activity associated with a given money supply. If we look mainly at M1 (lower graph), so clearly we see that since 2008 it has been declining velocity of circulation. From the same year while the U.S. Federal Reserve central bank tripled its balance sheet, ie the money supply has increased threefold.But this is hardly reflected in an increase in economic activity. Therefore, the U.S. GDP remains almost unchanged, which beautifully documents the decline in velocity. It follows that new money is getting into the real economy - the ordinary people. Conversely, the large financial houses left in order to clean up its balance sheet.


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