Quantity Theory of Money
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
The quantity theory of money (sometimes called QTM) says that prices rise when there is more in an and they fall when there is less money in an economy. The following formula expresses the theory:
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?
The quantity theory of money revolves around the basic idea that the more money to spend. This, when not done in moderation, can create runaway inflation.
Though it may seem that having more money to spend means people are "richer," it is important to 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 economy.