What is the equation of exchange?

The equation of exchange is an economic identity that shows the relationship between money supply, the velocity of money, the price level, and an index of expenditures. English classical economist John Stuart Mill derived the equation of exchange, based on earlier ideas of David Hume.

How does the equation of exchange affect inflation?

The equation of exchange puts together variables that relate to each other in a monetary economy. These are the money supply, the velocity of money, the economy's average price level, and the economy's real GDP. Inflation is also directly related to the price level and is driven by the rate at which the money supply increases in the economy.

What is the equation of exchange in monetarist theory?

Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ.

What is MV in exchange equation?

In this exchange equation, MV is the product of the money supply of currency units out in circulation and the number of times the currency changes hands in a year. This left side of the equation equals the amount of money used for spending in an economy for a certain period.