What is the equation of exchange?
The exchange equation is an economic theory that shows that part of the money in society has a price level. According to the equation, the amount of money is multiplied by the speed at which the amount of expenditure is equal to. This part of the equation equals the price level multiplied by the number of transactions. The exchange equation generally shows that more money in society eventually causes inflation. Economists often deal with the reasons why prices are rising and falling into a specific society, and the influence that has prices on the overall economic health of this society. Inflation can cause serious damage to the poorer members of society, so maintaining price levels at a reasonable level is paramount. Since more money is spreading throughout society, it tends to increase prices. This is the basic principle of quantity of money and equation of exchange is designed to show how this happens.
As an example of how the stock exchange equation works, imagine that there are 50 units of money in society. These 50 units spend a total ofTruly in a given period of time. Five times the speed in the equation or V, and 50 units is a cash supply or M. by multiplying M V brings a number of expenditures, which means that expenditure is 250 units or five times 50.
On the other side of the equation of exchange is the reaction of manufacturers in the economy. This part of the equation is the price or P, multiplied by transactions, or T. If the goods manufacturers set the average price per 25 units, it means that the amount of transactions would be achieved inversion of the equation and distributing expenditure by 250 units by 25, which brought a total of 10 transactions in this period.
What shows the equation of exchange is that the price levels are directly afficpo the amount of money in circulation. Since more money is poured into the company, manufacturers can respond in nature by increasing prices to keep up with increased demand for their products. Balance will be reached when demand is satisfied andThe money offer is exhausted. At this point, the prices begin to fall and create a certain circular pattern between buyers and sellers.