All else equal, a decrease in the growth rate in the velocity of money caused by a decrease in household consumption will in the short run cause: a decrease in inflation and a decrease in real growth.
What causes velocity of money to decrease?
When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink.
What happens when money supply decreases?
So the first thing that happens with a decrease in the money supply is that interest rates rise. As interest rates rise, businesses are less willing to invest to borrow for investment spending. And consumers, too, are less willing to borrow to buy cars and homes and so on. Thus spending decreases.
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