An economic theory which proposes a positive relationship between changes in the money supply and the long-term price of goods. Increasing the amount of money in the economy will eventually lead to an equal percentage rise in the prices of products and services. The calculation behind the quantity theory of money is based upon Fisher Equation, calculated as:
M x V = P x T
M: the money supply.
V: velocity of money.
P: average price level.
T: volume of transactions in the economy.
According to how the formula is derived, holding the transaction volume and velocity of money constant, any increases in the money supply will yield a proportional increase in the average price level.
Source: http://www.investopedia.com/terms/q/quantity_theory_of_money.asp
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