Quantity Equation

An equation which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services.

 The quantity equation of money is M x V = P x Y where: M is the quantity of money, V is the velocity of money, P is the price of output and Y is the total amount of output.

 

Because the velocity of money is relatively stable, when the central bank changes the quantity of money (M), it causes proportional changes in the nominal value of output (P x Y).