Equation Of Exchange
Categories: Forex
The equation of exchange purports that money supply (M) times the velocity of money (V) equals the average price level of goods (P) times an index of real expenditures, or quantity of economic transactions (Q) in macroeconomics.
It looks like this: M x V = P x Q
Sometimes that Q is a T, but the equation still holds the same function. As the name implies, the equation of exchange is about two aggregate sides of the economy exchanging money and goods/services.
The left side of the equation is the amount of money in the system times how fast it’s moving, representing the amount spent by consumers. The right side represents the total value of all goods and services sold by multiplying the price by the quantity.
This bird’s eye view of the economy helps economists determine which way the economy might be going, and which factors could potentially be tinkered with by the government to get the desired result. As the economy does its boom-and-bust dance, the equation of exchange follows suit.