Final answer:
The quantity theory of money equation, MV = PY, connects money supply (M) with price level (P) and real GDP (Y), showing how changes in the money supply can affect an economy's prices and output.
Step-by-step explanation:
The quantity theory of money is a fundamental equation in economics that relates the money supply in an economy to the price level and economic output. It is represented by the equation MV = PY, where M stands for the money supply, V denotes the velocity of money, P represents the price level, and Y is the real GDP or economic output. According to this theory, if the quantity of money in an economy is increased, holding velocity constant, it should lead to a proportional increase in the nominal value of goods and services or the price level, assuming real output remains the same.