March 28, 2014
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Collect Current Event
Notes: Quantity Theory of Money
Unit 3 Practice MC Q’s
The Quantity Theory of Money
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The relationship among money, price, and real output can be
represented by the equation of exchange.
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MV = PQ
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M = The Money Supply
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V = The Velocity of Money (The rate at which money is exchanged
from one transaction to another- measures the rate at which money in
circulation is used for purchasing goods and services.)
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Assume velocity is stable over time.
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P= The Average Price Level
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Q= Real GDP (real value of all final goods and services)
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This equation shows the balance between money and goods/services
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For a given level of V, if M increases more than Q then there must be
an increase in P to keep the two sides equal.