The correct answer is 1 only. Explanation & Key Takeaways: The velocity of money: • The velocity of money is a measurement of the rate at which money is exchanged in an economy. Hence, statement 1 is correct. • It is the number of times that money moves from one entity to another. • It also refers to how much a unit of currency is used in a given period of time. • Simply put, it's the rate at which consumers and businesses in an economy collectively spend money. • The velocity of money formula shows the rate at which one unit of money supply currency is being transacted for goods and services in an economy. • The velocity of money is typically higher in expanding economies and lower in contracting economies. • High money velocity is usually associated with a healthy, expanding economy. Low money velocity is usually associated with recessions and contractions. • The velocity of money is used on a much larger scale as a measure of transactional activity for an entire country’s population. In general, this measure can be thought of as the turnover of the money supply for an entire economy. • For this application, economists typically use GDP and either M1 or M2 for the money supply. Therefore, the velocity of money equation is written as GDP divided by money supply. • The velocity of Money = \(\dfrac{GDP}{Money\;Supply}\) • If GDP remains constant, an increase in the money supply would result in a decrease in the velocity of money and vice versa. Hence, statement 2 is not correct.