An elementary model of money circulation

• A set of equation for money circulation in the production system is formulated.
• The contribution to Gross Domestic Product from the bank system is defined.
• The relation of ‘the quantity theory of money’ is justified.

This paper investigates money circulation for a system, consisting of a production system, the government, a central bank, commercial banks and many customers of the commercial banks. A set of equations for the system is written; the theory determines the main features of interaction between production and money circulation. Investigation of the equations in a steady-state situation reveals some relationship among output of the production system and monetary variables. The relation of quantity theory of money is confirmed, whereas a new concept of the efficiency of the system is introduced.