## QUANTITY THEORY OF MONEY

THE QUANTITY THEORY OF MONEY, The quantity theory of money is a fundamental principle of economics that has been studied for centuries. It states that the value of money in circulation in an economy is directly proportional to the price level of goods and services available for purchase in that economy. In this blog post, we will explore the quantity theory of money in detail, its history, and its significance in modern economic theory.

### Introduction to the quantity theory of Money

The quantity theory of money is based on the idea that there is a direct relationship between the supply of money in an economy and the price level of goods and services in that economy. The theory posits that an increase in the money supply will lead to a proportional increase in the price level, while a decrease in the money supply will lead to a proportional decrease in the price level.

The concept of the quantity theory of money dates back to the 16th century when Spanish scholars first studied the impact of the influx of silver from the New World on the economy of Spain. Since then, the theory has evolved to include other factors that affect the relationship between money and the price level.

#### Historical Development of the Quantity Theory of Money

The first formal formulation of the quantity theory of money was proposed by the Scottish economist David Hume in the 18th century. Hume’s version of the theory was simple: if the money supply doubled, prices would also double, assuming that the velocity of money remained constant.

Later, the French economist Jean-Baptiste Say refined Hume’s theory by introducing the concept of the velocity of money. Say argued that an increase in the money supply would not necessarily lead to a proportional increase in prices because the velocity of money, or the speed at which money changes hands, could change. Say believed that an increase in the velocity of money could offset the effects of an increase in the money supply.

In the 19th century, the quantity theory of money was further developed by the English economist David Ricardo. Ricardo’s version of the theory introduced the concept of the quantity of money demanded. According to Ricardo, the demand for money was a function of the price level and the velocity of money. Ricardo believed that an increase in the demand for money would lead to a decrease in the price level, while a decrease in the demand for money would lead to an increase in the price level.

The quantity theory of money was further refined in the 20th century by the American economist Irving Fisher. Fisher introduced the concept of the equation of exchange, which states that the total amount of money spent in an economy is equal to the total value of goods and services produced in that economy. Fisher’s equation of exchange is expressed as MV=PT, where M is the money supply, V is the velocity of money, P is the price level, and T is the total value of goods and services produced.

##### Significance of the Quantity Theory of Money

The quantity theory of money is significant for several reasons. First, it provides a theoretical framework for understanding the relationship between the money supply and the price level. This understanding is essential for policymakers to make informed decisions about monetary policy.

Second, the quantity theories of money is an essential tool for forecasting inflation. By tracking changes in the money supply and the velocity of money, economists can predict how changes in the economy will affect the price level.

Finally, the quantity theory of money is important for understanding the role of money in the economy. Money serves as a medium of exchange, a unit of account, and a store of value. By understanding the relationship between the money supply and the price level, economists can better understand how money affects the economy.

##### Criticism of the Quantity Theory of Money

Despite its significance, the quantity theory of money has been subject to criticism from some economists. One criticism is that the theory assumes a constant velocity of money. In reality, the velocity of money is not

Definition: The quantity theory of money is defined as the relationship between the quantity of money in circulation in an economy and the price level.

The quantity theory of money is one of the theories that try to explain what happens when there is an imbalance between the demand for money (by households and firms) and the supply of money to these economic units.

The theory explains that if people hold more money than they require (i.e. if there is an excess supply of money over demand), they will spend the surplus on currently produced goods and services. This will increase the price level.

The quantity theory of money also states that an increase in the quantity of money in circulation would bring about services. Professor Irving Fisher remodified the quantity theory of money into what is known as the velocity of circulation of money.

Velocity of circulation of money according to Professor Fisher, refers to the speed at which money circulates within the economy by changing from one hand to another. When there

1. BALANCED DIETS
141. LACTATION DIETS
142. MALNUTRITION
2. R
3. PROTOZOAN DISEASES
155. TRYPONOSOMIASIS

159. TAPE WORM
160. ROUND WORM OF PIGS
161. LIVER FLUKE
162. ECTO PARASITES
163. TICK