Related Content

More Like This

Show all results sharing these subjects:

  • Social sciences
  • Economics


Show Summary Details


quantity theory of money

Quick Reference

The theory that the price level is proportional to the quantity of money. This is expressed by the quantity equation, MV = PT, where M is the quantity of money, V is the velocity of circulation, P is the price level, and T is the volume of transactions. The quantity theory assumes that T is determined by supply-side forces, which determine the level of real output, and institutional factors, which determine the ratio of total transactions to output; and V is determined by the legal status and operating habits of the financial system. These assumptions allow T and V to be treated as fixed. The quantity equation then implies that P must be proportional to M. This reasoning supports the assertion of Milton Friedman (1912–2006) that inflation is caused by increases in the money supply. If T and V are not taken as fixed the direct link between money and prices is lost and a broader range of economic considerations enters the analysis.

Subjects: Social sciencesEconomics

Reference entries