What is the quantity theory of money equation?

M x V = P x Q

M – money supply

V – Velocity of Money (rate at which money is spent)

P – Prevailing Price Level (how much things cost)

Q – Quantity of goods and services produced in the economy

What this equation is trying to explain is that money is a commodity like anything else, and the greater the supply of money, the less value it has. For instance, if you were to double the amount of money in an economy, you can safely assume that the cost of goods and services will also double.

 

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