What is the Quantity Theory of Money?
The quantity theory of money argues that the size of thesupply influences the price of goods.
Quantity Theory of Money -- Formula & How to Calculate
M x V = P x T
Where M = the money supply
V = the velocity of money
P = average prices
T = number of transactions in the economy
Economist Henry Thornton is credited with developing the theory in 1802 after noticing that the more gold and silver Europe imported in the 16th century, the more things cost.
Why does the Quantity Theory of Money matter?
Though it may seem that having more money to spend means people are "richer," it is important to economy.that the increase in money supply means rent, groceries, gas, cars, and college tuitions increase in price too, offsetting the effects of having more money. In short, the amount of money in an determines the value of the money in the