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Money and Banking by William D. Gerdes

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CHAPTER 2

Money and Income

Fisher’s Equation of Exchange

The equation of exchange was the mechanism employed by Irving Fisher to analyze the relationship between money and economic activity.1 The basis for the equation was the proposition that there are two sides to every transaction: a buyer and a seller. Aggregating across all transactions, the total value of all things bought (B) is exactly equal to the total value of all things sold (S).

The right-hand side of the relationship is the goods side. The total value of all things sold (S) is equal to the sum of the price times the quantity for each item sold. Fisher wrote this as PT, where P is ...

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