Question

In the equation of exchange if m increases, but velocity and quantity are constant, what must happen?

1. trucchi
In the equation of exchange if m increases, but velocity and quantity are constant the price level must increase.

### What is the equation of exchange?

• The quantity theory of money is mathematically expressed in the equation of exchange.
• In its most basic form, the equation states that the total amount of money in an economy equals the total money value of goods in circulation, or that nominal spending equals nominal income.
• If m increases in the equation of exchange while velocity and quantity remain constant, the price level must rise.
• M × V ≡ P × Q is the equation of exchange.
• The average number of times a dollar is spent on final goods and services in a year is defined as velocity.
Therefore, in the equation of exchange if m increases, but velocity and quantity are constant the price level must increase.
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