Equation of Exchange 
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)                                

Changes in the money market affect the level of economic activity in the output market.  The relationship between money and aggregate output, or GNP, is related to the concept of velocity.  The velocity of money is the number of times money is exchanged for final goods and services within a given year.  In other words, velocity refers to the average number of times any given dollar changes hands in transactions for final goods and services in a year.

The equation of exchange relates money (M), velocity (V), and the total output of final goods and services in the economy (Y = GNP) as:

M X V = Y

Where M refers to M1 money.  The equation states that the money supply times the number of times money is used to buy final goods and services is equal to nominal GNP.

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