What is the Velocity of Money? Part 1

Good day Steemians!

I've decided to create posts related to economics, but more specifically about how our current monetary system works.
At the moment most countries have a central bank controlling its currency supply. These banks are run by some committee agreeing on what monetary policy to implement to keep the economy going (In the USA the FOMC serves as this body).

Now, I think that the velocity of money is a nice starting point to begin to understand how our fiat currency system works and also to realize that the people of a country has a lot more power than you might think (more on that in future posts).

So, what is the velocity of money? Simply put, it how many times a dollar changes hands in a year. So a velocity of 1 means that one dollar only bought one dollar's worth of goods that year. So you can begin to see that the higher the velocity of money is, the more people and businesses are spending and in theory that economy should grow.

This is where inflation comes in. Obviously inflation and the velocity of money are correlated right? If the velocity is, say, 20, which means 1 dollar changed hands 20 times that year, this means that inflation will go up. We all know inflation is the increase in price of goods and services and the big thing that drives prices are supply and demand. This means that with a high velocity of 20 the demand for goods and services must be high so prices must rise.

Note: there is actually a big difference between money and currency (as I learned from Mike Maloney), but I used them interchangeably in this post.

Next: In part 2 I will explain the role that velocity of money plays when, like last week in the US, the central banks raises the interest rate. Stay tuned for more and thanks for reading!