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. The equation states that: MV = PT where M is the quantity of money in circulation, V is the average velocity of money over a given period time (usually a year), P is average prices during that same period, and T represents total spending or GDP.This equation helps us to understand how changes in any one variable can impact all other variables in the system.For example, if there was an increase in M (money supply) then P (price level) would likely go up as well because businesses would need to adjust their prices to account for more circulating currency.However if V (velocity) increased at the same time then PT (total spending or GDP) would also go up because there would be more transactions taking place since people are exchanging this extra money more quickly. In short, this equation provides a snapshot view of how different aspects of our economy are interconnected.
