The demand for money. The quantity theory assumes that the demand for money changes directly and in strict proportion to the level of national income – an assumption that is not unreasonable if the transactions demand is the only source of the desire to hold money balances.
To express this assumption in symbolic terms, let 
stand for the demand for money, let Y stand for real national income, and let P stand for the average price at which goods and services are sold in the markets of the economy. Then we can write the assumed relationship as
where k is a constant showing desired money balances as a fraction of the value of annual national income. If firms and households hold money balances equal to the value of two weeks’ sales and purchases, k would be 1/26 and the demand for money could be expressed as 
The supply of money. For the moment we shall assume that the overall quantity of money, which we designate by M, can be set at any amount desired by the Bank of Canada operating in its capacity as the nation’s central bank. Within broad limits, as we have seen, the privately owned banks can exercise considerable control over the money supply. The limits themselves are determined by the central bank, which has the ultimate power to control major changes in the supply of money.
The demand for money and aggregate demand. The link between money and aggregate demand for commodities is provided in the classical quantity theory by the assumption that when firms and households do not hold the amount of money that they would like to hold, they try to alter their money holdings by altering their expenditures on commodities. If they have more money than they wish to hold, they raise their expenditures on commodities. If they have more money than they wish to hold, they raise their expenditures above their receipts so as to spend their unwanted money balances. This raises aggregate demand. If they have less money than they wish to hold, they cut their spending below their receipts so as to increase their holdings. This lowers aggregate demand.
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