Equation of Exchange-again

m + v = p + y

• m = % change in money supply
• v = % change in velocity
• p = % change in price level
• y = % change in real GDP

To get from the first equation of exchange (MV = PY) to the second ( m + v = p + y) we need only use a little algebra - which we will not do here. This equation specifies the relationships between the growth rates in the variables. The growth rate in the money supply plus the growth rate in velocity equals the growth rate in nominal output which in turn equals the growth rate in the price level plus the growth rate in real output. If we accept the Classical assumptions that the the level of output will be unaffected by changes in the money supply (y = 0) and that velocity will be constant (v=0), then we are left with a direct relationship between the growth rate in prices and the money supply

p = m