- The quantity theory of money is the direct relationship between
the money and the level of prices of goods and services sold
- Increase in money supply causes prices to rise.
- The quantity theory of money states that the price level of
goods and services is directly proportional to the money in
circulation or supply.
- If the amount of money in an Economic becomes double,
- Price levels also become double.
- Resulting in inflation of prices.
- Increase in money supply causes prices to rise as they
compensate for the decrease in money's marginal value.
The quantity theory of money equation is given by
MXV=PXY
Where M is money supply.
V is the velocity of money.
P is the GDP deflator
Y is the level of adequate output or the Gross Domestic
Product.