Quantity Theory of Money
Overview
The quantity theory of money states that
{% MV = PY %}
where
- M = Stock of Money
- V = Money Velocity, which equals the average number of times that a given unit of currency is exchanged in the
given time period.
- P = General Price Level - represents the average level of prices in the economy
- Y = National Production - the amount of product sold in the economy over the specified period.
Price Forecasts
The quantity theory of money provides a possible way to forecast changes in the general level of prcies due to changes in the
economy (primarily the money supply and real national production). (inflation)
{% P = MV/Y %}
If the money velocity can be assumed to be constant, this equation relates prices to money and production. As a general rule, the velocity
of money is not constant (except possibly in the
long run)
