In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional relationship with the price level. For example, if the currency in circulation increased, there would be a proportional increase in the price of goods.
The theory was challenged by Keynesian economics, but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
Read more about Quantity Theory Of Money: Origins and Development of The Quantity Theory, Equation of Exchange, Cambridge Approach, Quantity Theory and Evidence, Criticisms
Famous quotes containing the words quantity, theory and/or money:
“Among the virtues and vices that make up the British character, we have one vice, at least, that Americans ought to view with sympathy. For they appear to be the only people who share it with us. I mean our worship of the antique. I do not refer to beauty or even historical association. I refer to age, to a quantity of years.”
—William Golding (b. 1911)
“Osteopath—One who argues that all human ills are caused by the pressure of hard bone upon soft tissue. The proof of his theory is to be found in the heads of those who believe it.”
—H.L. (Henry Lewis)
“Put not your trust in money, but put your money in trust.”
—Oliver Wendell Holmes, Sr. (1809–1894)