In monetary economics, the equation of exchange is the relation:
where, for a given period,
Thus PQ is the level of nominal expenditures. This equation is a rearrangement of the definition of velocity: V = PQ / M. As such, without the introduction of any assumptions, it is a tautology. The quantity theory of money adds assumptions about the money supply, the price level, and the effect of interest rates on velocity to create a theory about the causes of inflation and the effects of monetary policy.
In earlier analysis before the wide availability of the national income and product accounts, the equation of exchange was more frequently expressed in transactions form:
where
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