Quantity Theory of Money

The quantity theory of money is an economic principle that describes the relationship between the amount of money in an economy and the level of prices. It suggests that if the money supply increases, and all else remains constant, prices will eventually rise, leading to inflation. The theory is often summarized by the equation MV = PQ, where M is the money supply, V is the velocity of money (how quickly it circulates), P is the price level, and Q is the quantity of goods and services produced. Essentially, more money in circulation tends to lead to higher prices if production doesn’t keep pace.