Equation of Exchange

The equation of exchange is an economic formula that represents the relationship between the money supply, the velocity of money, the price level, and the output of goods and services in an economy. Expressed as MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services, it shows how changes in money supply can impact economic activity and inflation. The equation of exchange is a key concept in monetary economics, helping economists understand the effects of monetary policy on economic growth and price stability.

Example

If the money supply (M) increases while the velocity (V) and output (Q) remain constant, the price level (P) is likely to rise, indicating inflation.