Quantity Theory of Money

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  • According to this theory, changes in the money supply will lead to proportionate changes in the price level or inflation. The quantity theory of money is represented by the equation MV = PQ, where M is the total money supply circulating in the economy during a specific period of time; V is the velocity, or the number of times or transactions per period or year in which the money is spent on final goods within the defined period; P is the average price level during the defined period; and Q is the physical quantity of all final goods produced in the defined period. The left-hand side of the equation, MV, is the total monetary expenditures on the final goods produced within the period, and this ...

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