Question

Understand the equation of exchange and its importance in the quantity theory of money and prices.

Short answer

Equation of exchange plays an important role in the economy as well as in the quantity theory of money and prices.

Step-by-step solution

introduction

The quantity theory of money expresses that there is an immediate connection between the quantity of money circling in the economy and the degree of costs of labour and products sold.

explanation

Equation of exchange straightforwardly influences the costs, yield, genuine GDP, and work in the economy. Condition of trade was propounded to help this relationship.

It is given by MV = PQ where,

M- Money supply

V- Circulation velocity

P- Price level

Q- Economic output