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EQUATION OF EXCHANGE. The Equation of Exchange addresses the relationship between money and price level, and between money and nominal GDP. The equation simply states: M x V = P x Y. Where M = the money supply, usually the M1. V = the velocity of money. P = the price level. Y = real output, or real GDP. Velocity is the number of times the average dollar is spent to buy final goods and services in a. The calculation for both real as well as nominal values is simple and can be done with the help of the following formula: Real Value = Nominal Value / (1 + (i / 100)) i = The prevailing inflation rate in the market. Subjectivity in Real Value of Money: It must be understood that the real and nominal values of money are subjective. How to calculate real money supply from nominal money supply. The real value of money takes into account inflation and all such forces that cause the change value of money. Thus real value of money is adjusted nominal value with inflation rate. Therefore real money supply in economy helps to observe the real purchasing power of money. Calculate the real money supply

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