Which of the following identities describes the equation of exchange?
A) money in circulation × prices = velocity × income
B) money in circulation × income = velocity × prices
C) real GDP = money in circulation × velocity
D) nominal GDP = money in circulation × velocity
E) real GDP = prices × money in circulation × velocity

Question

Quizplus · Accepted Answer

The equation of exchange is described by the formula MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced (real GDP). When P and Q are multiplied together, they equal nominal GDP, making the correct representation of the equation of exchange: nominal GDP = money in circulation × velocity.

Which of the Following Identities Describes the Equation of Exchange