Quantity Theory

The Quantity Theory of Money suggests that the overall price level of goods and services in an economy depends on the amount of money in circulation and how quickly it is used. Essentially, if the money supply increases faster than the economy’s ability to produce goods, prices tend to rise, leading to inflation. Conversely, if money supply grows slowly or decreases, prices may fall. This theory highlights the link between the money supply and inflation, emphasizing that controlling how much money is in the economy can help manage price stability.