Final answer:
The equation of exchange relates the quantity of money in an economy to the value of transactions. It includes four variables: M (money supply), V (velocity of money), P (price level), and T (volume of transactions).
Step-by-step explanation:
The equation of exchange is a monetary theory that relates the quantity of money in an economy to the value of transactions. It is represented by the equation:
M x V = P x T
Where:
M: The total money supply in the economy
V: The velocity of money, or the average number of times each unit of money is spent in a year
P: The price level, or the average price of goods and services in the economy
T: The volume of transactions, or the total value of all goods and services exchanged in the economy
For example, if the money supply and the velocity of money remain constant, an increase in the volume of transactions would result in a corresponding increase in the price level.