The equation MV PT is known as

Analyze the question: The equation MV = PT is a famous formula in monetary economics. We need to name it.

Explain the concept: This is the Fisher equation, from the Quantity Theory of Money, developed by the American economist Irving Fisher. It links the money supply to the price level.

• M = quantity (supply) of money in circulation
• V = velocity of circulation (the average number of times a unit of money changes hands in a given period)
• P = average price level
• T = volume of transactions (the number of goods and services traded)

Solution:

1. The left side, MV, is the total money spent in the economy.
2. The right side, PT, is the total value of goods and services sold.
3. Whatever is spent by buyers is received by sellers, so the two sides must be equal. The equation shows money being exchanged for goods and services, so it is called the equation of exchange.

Checking the other options:

• A. Demand and supply equation: this deals with Qd and Qs, not money and prices.
• B. Equilibrium equation: this describes a market-clearing condition, not this formula.
• D. Money supply equation: MV = PT is not used just to measure the money supply, although M can be derived from it.
• E. Price index numbers: these are calculated by weighting prices against a base year, which is a different method.

Answer: The correct option is C. equation of exchange.

Exam tip: Remember "MV = PT" as "Money moves, Prices track." If you see MV = PT, think Fisher and Equation of Exchange. Also note that if V and T are constant, then P changes in direct proportion to M. This is the core of the Quantity Theory of Money, and it is often tested alongside this definition.