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Information > Financial Terms > This page Equation of Exchange Changes
in the money market affect the level of economic activity in the output
market. The relationship
between money and aggregate output, or GNP, is related to the concept
of velocity. The velocity
of money is the number of times money is exchanged for final goods and
services within a given year. In
other words, velocity refers to the average number of times any given
dollar changes hands in transactions for final goods and services in a
year. The
equation of exchange relates money (M), velocity (V), and the total output
of final goods and services in the economy (Y = GNP) as: M
X V = Y Where
M refers to M1 money. The
equation states that the money supply times the number of times money
is used to buy final goods and services is equal to nominal GNP. |