ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Thus P. Y is the nominal income or output where Y is the total income. Now the quantity theory equation becomes: PY = MV. This is known as the ‘income version’ of quantity theory of money.

Detailed explanation-2: -Definition: Quantity theory of money states that money supply and price level in an economy are in direct proportion to one another. When there is a change in the supply of money, there is a proportional change in the price level and vice-versa.

Detailed explanation-3: -Lesson Summary. The equation of exchange shows how money supply, the velocity of money, and price level relate to each other. It is written as MV = PY, where M stands for the money supply, V stands for velocity of money, P stands for the average price level in the economy, and Y stands for the real GDP of the economy.

Detailed explanation-4: -The equation of exchange is a mathematical expression of the quantity theory of money. In its basic form, the equation says that the total amount of money that changes hands in an economy equals the total money value of goods that change hands, or that nominal spending equals nominal income.