<p>This is because by definition velocity of money is basically how quickly people spend money they get. Hence any factor that causes people to hold money holder decreases velocity of money and vice versa.</p>

<p>The frequency people get pay might affect how quickly they spend money. For example, if you are paid quarterly basis you will probably be more conservative with your spending to make sure your money lasts for whole quarter (extreme example just to show the point) then if you are paid on monthly basis and you will be even less conservative with your spending if you get paid every week or every day. </p>

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2020-04-10T14:56:19.780Z
+1 but yeah, there are some extra assumptions baked into that question/answer, which don't make good pedagogy. The (extra) assumptions [seem correct](https://www.econstor.eu/bitstream/10419/170866/1/dp10882.pdf) but are not trivial.
fantastic peace and prosperity
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2020-04-10T15:02:07.870Z
@Fizz I don’t disagree on that but honestly from pedagogical perspective some simpler explanation to this kind of high school looking like questions to me seems more appropriate from pedagogical perspective.
1muflon1
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2020-04-10T15:23:30.313Z
Do you mean it simply boils down to the psychology of people?
 [_italic_ ](This is because by definition velocity of money is basically how quickly people spend money they get.)

True but the amount of spending will also differ correct? Does it matter if some spends 15 dollars twice or 30 dollars in a single go? My assumption is that the requirement of the consumer per unit time remains the same. So the frequency would be more but amount of money spend should be less, thus, making no difference.
Grim_Reaper
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2020-04-10T15:23:35.280Z
Also, if we are assuming that people will spend more if they have more money in hand on a frequent basis, why isn't option d correct?
Grim_Reaper
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2020-04-10T15:28:20.420Z
@Grim_Reaper it’s not about the quantity of money spend but only about their speed. It’s not necessary about psychology, although it can play role as well you can get the same result with uncertainty even if people are rational under certain assumptions. Velocity is about how much one euro is used in economy - you taking one euro and buying chocolate, the business taking that one euro and paying their wages their employees taking that one euro and buying something with it.
1muflon1
CC BY-SA 4.0
2020-04-10T15:58:36.443Z
@1muflon1

When we say, velocity of money is how quickly people spend money, the money is constant, right? Though in this case, money is variable. If a consumer gets 100 dollars a month salary they will get 50 dollars if they are receiving it bi weekly.

Let me phrase the question differently, if I have 100 dollars to spend.
Scenario 1: I buy 100 candies worth 1 dollar each from different stores
Scenario 2: I buy 1 huge candy which costs 100 dollars

In both scenarios, I'm spending 100 dollars. In the scenario 1, I'm just spending it one by one. But, the velocity is same, correct?
Grim_Reaper
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2020-04-10T16:00:29.413Z
Velocity would be Total amount of money spend for a given time frame and not just total number of times the money is spend, right?
Grim_Reaper
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2020-04-10T16:10:37.340Z
@Grim_Reaper no velocity for one euro is how many times it is used in a given unit of time. For example, if one euro coin it has to be the same coin day used 10 times to purchase goods or services it’s velocity would be 10. For an economy the velocity is an average velocity of all money in economy, in narrow sense it does not really matter what’s the total amount of money as you average it in the end. So it’s not about the size of the paycheck but more about the fact that if you are paid less frequently you will form some cushion - some money will not circulate at all and hence average...
1muflon1
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2020-04-10T16:10:53.193Z
Velocity of money will be lower.
1muflon1
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2020-04-10T18:42:34.997Z
I'm still not convinced. So you are saying that if I get payed less frequently I would start saving some fraction of my income, right? But wouldn't the size of my cushion just depend on the distribution of necessary expenditures arising during a given month? Why should this depend on the frequency of monthly wage payments?
VARulle
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2020-04-10T18:56:15.940Z
@VARulle yes but it’s not like that distribution is exactly known and even constant. Also even if it would be constant the larger the tails of distribution the larger precautionary saving you need especially if you are risk averse which just empirically most people are. Generally uncertainty increases with time, of course the increase might not be large on small scales so you could maybe argue that the question your prof was asking should maybe have years instead of months but it’s a stylized question. Furthermore, people might not be rational. For example, there are some studies...
1muflon1
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2020-04-10T18:59:22.973Z
That show people are more likely to run out of their budget when they receive payments less frequently, especially when they are less educated, some people might correct this behavioral bias by taking out extra savings. Even if not then velocity of money drops just because you run out of budget and have to suppress your consumption until next paycheck. You also have hyperbolic discounting which is actually connected to the previous behavioral result which would further push for more saving if you get paid less frequently... there might be also some other reasons.
1muflon1
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2020-04-10T23:08:24.773Z
With a longer-tailed distribution you need more precautionary savings, yes, but you also need these when you are paid daily. I see no connection here. If I run out of budget I have to suppress my consumption until next paycheck, yes, but then my € coins have already been spent and velocity was higher since last paycheck, which averages out over the month, so again I don't see a reason. Hyperbolic discounting ... ? In the end every € coin I earn is a € coin I spend exactly once, averaged over a year or so. The only reason for a decrease in velocity I can imagine here ...
VARulle
CC BY-SA 4.0
2020-04-10T23:11:48.780Z
... is a permanent decrease in the frequency of inflowing coins (I earn less) or a permanent decrease in the frequency of outflowing coins (I spend less). The latter means that my savings are not at some precautionary fixed level but constantly increase. It is beyond me how that should be a consequence of whether I am paid weekly or monthly. (I also looked up the link to the question and the tutorial video on which it is based and there they just state something corresponding to answer (c) without providing any reason for it.)
VARulle
CC BY-SA 4.0
2020-04-10T13:50:32.733Z
2020-04-10T14:56:07.730Z
2020-04-10T14:56:07.730Z
1muflon1
<p>I don't have any economics background, and was going though a course on Macroeconomics. I was solving the practice question here: <a href="https://mru.org/practice-questions/causes-inflation-practice-questions?sid=2719557" rel="nofollow noreferrer">https://mru.org/practice-questions/causes-inflation-practice-questions?sid=2719557</a></p>

<p>The last question says:</p>

<p>The velocity of money is affected by which of the following? *</p>

<p>a. How quickly the treasury prints new money.</p>

<p>b. If a consumer makes purchases with large bills or smaller bills.</p>

<p>c. If workers are paid weekly, bi-weekly, or monthly.</p>

<p>d. If a consumer uses a payment plan to purchase something or pays outright.</p>

<p>The answer is c. I cannot understand why does the frequency of payment matters. Also, if c is correct, why is option d wrong?</p>

<macroeconomics><inflation><labor-economics>
Why is the velocity of money in an economy affected by the frequency in which the worker is paid (like weekly, bi-weekly, monthly, etc.)?
Grim_Reaper
# Why is the velocity of money in an economy affected by the frequency in which the worker is paid (like weekly, bi-weekly, monthly, etc.)?

(Asked by: username_0 on 2020-04-10)

I don't have any economics background, and was going though a course on Macroeconomics. I was solving the practice question here: <https://mru.org/practice-questions/causes-inflation-practice-questions?sid=2719557>

The last question says:

The velocity of money is affected by which of the following? \*

a. How quickly the treasury prints new money.

b. If a consumer makes purchases with large bills or smaller bills.

c. If workers are paid weekly, bi-weekly, or monthly.

d. If a consumer uses a payment plan to purchase something or pays outright.

The answer is c. I cannot understand why does the frequency of payment matters. Also, if c is correct, why is option d wrong?

**Tags:** macroeconomics, inflation, labor-economics


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## 1 answers

### Answer by username_1 on 2020-04-10. Score: 1

This is because by definition velocity of money is basically how quickly people spend money they get. Hence any factor that causes people to hold money holder decreases velocity of money and vice versa.

The frequency people get pay might affect how quickly they spend money. For example, if you are paid quarterly basis you will probably be more conservative with your spending to make sure your money lasts for whole quarter (extreme example just to show the point) then if you are paid on monthly basis and you will be even less conservative with your spending if you get paid every week or every day.

> **Comments:**
> **username_2**: +1 but yeah, there are some extra assumptions baked into that question/answer, which don't make good pedagogy. The (extra) assumptions [seem correct](https://www.econstor.eu/bitstream/10419/170866/1/dp10882.pdf) but are not trivial.  
> **username_1**: @Fizz I don’t disagree on that but honestly from pedagogical perspective some simpler explanation to this kind of high school looking like questions to me seems more appropriate from pedagogical perspective.  
> **username_0**: Do you mean it simply boils down to the psychology of people?  [_italic_ ](This is because by definition velocity of money is basically how quickly people spend money they get.)  True but the amount of spending will also differ correct? Does it matter if some spends 15 dollars twice or 30 dollars in a single go? My assumption is that the requirement of the consumer per unit time remains the same. So the frequency would be more but amount of money spend should be less, thus, making no difference.  
> **username_0**: Also, if we are assuming that people will spend more if they have more money in hand on a frequent basis, why isn't option d correct?  
> **username_1**: @username_0 it’s not about the quantity of money spend but only about their speed. It’s not necessary about psychology, although it can play role as well you can get the same result with uncertainty even if people are rational under certain assumptions. Velocity is about how much one euro is used in economy - you taking one euro and buying chocolate, the business taking that one euro and paying their wages their employees taking that one euro and buying something with it.  
> **username_0**: @username_1  When we say, velocity of money is how quickly people spend money, the money is constant, right? Though in this case, money is variable. If a consumer gets 100 dollars a month salary they will get 50 dollars if they are receiving it bi weekly.  Let me phrase the question differently, if I have 100 dollars to spend. Scenario 1: I buy 100 candies worth 1 dollar each from different stores Scenario 2: I buy 1 huge candy which costs 100 dollars  In both scenarios, I'm spending 100 dollars. In the scenario 1, I'm just spending it one by one. But, the velocity is same, correct?  
> **username_0**: Velocity would be Total amount of money spend for a given time frame and not just total number of times the money is spend, right?  
> **username_1**: @username_0 no velocity for one euro is how many times it is used in a given unit of time. For example, if one euro coin it has to be the same coin day used 10 times to purchase goods or services it’s velocity would be 10. For an economy the velocity is an average velocity of all money in economy, in narrow sense it does not really matter what’s the total amount of money as you average it in the end. So it’s not about the size of the paycheck but more about the fact that if you are paid less frequently you will form some cushion - some money will not circulate at all and hence average...  
> **username_1**: Velocity of money will be lower.  
> **username_3**: I'm still not convinced. So you are saying that if I get payed less frequently I would start saving some fraction of my income, right? But wouldn't the size of my cushion just depend on the distribution of necessary expenditures arising during a given month? Why should this depend on the frequency of monthly wage payments?  
> **username_1**: @username_3 yes but it’s not like that distribution is exactly known and even constant. Also even if it would be constant the larger the tails of distribution the larger precautionary saving you need especially if you are risk averse which just empirically most people are. Generally uncertainty increases with time, of course the increase might not be large on small scales so you could maybe argue that the question your prof was asking should maybe have years instead of months but it’s a stylized question. Furthermore, people might not be rational. For example, there are some studies...  
> **username_1**: That show people are more likely to run out of their budget when they receive payments less frequently, especially when they are less educated, some people might correct this behavioral bias by taking out extra savings. Even if not then velocity of money drops just because you run out of budget and have to suppress your consumption until next paycheck. You also have hyperbolic discounting which is actually connected to the previous behavioral result which would further push for more saving if you get paid less frequently... there might be also some other reasons.  
> **username_3**: With a longer-tailed distribution you need more precautionary savings, yes, but you also need these when you are paid daily. I see no connection here. If I run out of budget I have to suppress my consumption until next paycheck, yes, but then my € coins have already been spent and velocity was higher since last paycheck, which averages out over the month, so again I don't see a reason. Hyperbolic discounting ... ? In the end every € coin I earn is a € coin I spend exactly once, averaged over a year or so. The only reason for a decrease in velocity I can imagine here ...  
> **username_3**: ... is a permanent decrease in the frequency of inflowing coins (I earn less) or a permanent decrease in the frequency of outflowing coins (I spend less). The latter means that my savings are not at some precautionary fixed level but constantly increase. It is beyond me how that should be a consequence of whether I am paid weekly or monthly. (I also looked up the link to the question and the tutorial video on which it is based and there they just state something corresponding to answer (c) without providing any reason for it.)  

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