quantity theory of money
quantity theory of moneyThe 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. It is argued by supporters of the quantity theory 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. Thus M and P must vary in proportion. These assumptions lead to Milton Friedman's statement that inflation is caused by increases in the money supply.
Critics of the quantity theory urge that it can only hold in the very long run, if at all. Desired holdings of real balances...
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