Equation of exchange
What is equation of exchange?
This is an economic calculation showing the relationship between four measures. Its formula is M x V = P x T. M means money supply, V means velocity of money, P is average price level of goods and T is the index of expenditures.
Where have you heard about equation of exchange?
Its mainly used as a key principle in the quantity theory of money, which states that the price level of goods and services is directly proportional to the supply of money in circulation.
What you need to know about the Equation of exchange.
The algebraic formula was first produced by American economist Irving Fisher, who based it on the earlier works of John Stuart Mill and David Hume. In the context of the quantity theory of money, the formula is expressed as M × V= P × Q = Total Spending or GDP. This is used by the group of economists known as monetarists, who believe fluctuations in the money supply are the main cause of fluctuations in economic output and the major cause of inflation is excessive growth in money supply.