The Quantity Theory of Money

The Quantity Theory of Money is an economic principle that states the amount of money in an economy directly influences price levels and inflation. It suggests that if the money supply increases without a corresponding increase in goods and services, prices will rise, leading to inflation. Conversely, if the money supply decreases, prices tend to fall. This theory emphasizes the relationship between money, economic output, and price stability, helping to explain how changes in monetary policy can affect overall economic health. Essentially, more money can mean higher prices if the economy doesn't grow at the same pace.