• The equation of exchange is a mathematical expression of the quantity theory of money.

  • In its basic form, the equation says that the total amount of money that changes hands in the economy is equal to the total monetary value of the goods that change hands, or that nominal spending equals nominal income.
  • The equation of exchange was used to prove that inflation would be proportional to changes in the money supply and that the total demand for money could be broken down into demand for use in transactions and demand for holding money for its liquidity.