NCEA Level 2 Economics Practice Test

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In MV = PQ, what does M represent and what does it include?

Money supply (notes and coins, money held in accounts)

The key idea is that in the equation MV = PQ, the amount of money in the economy (M) times the speed at which that money circulates (V) drives the nominal value of output (PQ). M is the money supply—the stock of money available for transactions. It includes currency in circulation (notes and coins) and money held in bank accounts (deposits). That’s exactly what the option describes. The other parts of the equation are velocity (V), price level (P), and real output (Q), so they’re not what M represents.

Velocity of circulation

Price level

Real output