Quantity Theory of Money Explained
The quantity theory of money states that the general price level of goods and services in an economy is directly proportional to the amount of money in circulation. This relationship is often represented by the equation: MV = PT.
- M is the money supply
- V is the velocity of money (how quickly money is spent and respent)
- P is the price level
- T is the number of transactions
In simpler terms, if the amount of money (M) in an economy increases, and the velocity of money (V) and the number of transactions (T) remain constant, the price level (P) will increase.
However, as @taskmaster4450le mentioned, the velocity of money has been declining, which challenges the theory's validity, especially in the digital age.
FINALLLY!!!!!!