The Quantity Theory of Money
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M
Money supply is the value of funds in circulation. This includes notes, coins and money held in accounts with banks or other financial institutions
P
Price level is the 'average' price of all goods produced in the economy
Q
Real output is the level of production (or output) in the economy
The Quantity Theory of Money
The Quantity Theory of Money states that the money supply (M) times the velocity of circulation (V) is always equal to the price level (P) times the level of output (Q) i.e. MV = PQ
V
Velocity of circulation is the rate at which money is spent