explain the quantity theory of money
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In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. ... The theory was challenged by Keynesian economics, but updated and reinvigorated by the monetarist school of economics..
The relationship between the supply of money and inflation, as well as deflation, is an important concept in economics. The quantity theory of money is a concept that can explain this connection, stating that there is a direct relationship between the supply of money in an economy and the price level of products sold.
What Is the Quantity Theory of Money?
The quantity theory of money is the idea that the supply of money in an economy determines the level of prices, and changes in the money supply result in proportional changes in prices.
In other words, the quantity theory of money states that a given percentage change in the money supply results in an equivalent level of inflation or deflation.
This concept is usually introduced via an equation relating money and prices to other economic variables.