Quantity Theory of Money
What is Quantity Theory of Money?
The idea that money supply times its velocity equals the price level times real output.
Understanding Quantity Theory of Money
The equation of exchange, MV = PY, is an identity. The quantity theory adds the assumption that velocity and real output are fairly stable, so sustained money growth shows up mainly as inflation.
It describes long-run and high-inflation episodes well, but velocity can swing sharply in the short run.