The equation of exchange (MV = PQ) illustrates how changes in the money supply influence the level of prices (P) and/or total output (Q).

Question

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The equation of exchange, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced, demonstrates how changes in the money supply (M) can affect the price level (P) and the total output (Q), assuming V is constant.

The Equation of Exchange (MV = PQ) Illustrates How Changes