What is equation of exchange?

The equation of exchange is a fundamental economic concept represented by the formula MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced (real output). This equation illustrates the relationship between money and economic activity, indicating that the total amount of money in circulation multiplied by the rate at which it is spent equals the total value of all transactions in an economy. It highlights how changes in the money supply can influence inflation and economic output.