Quantity Theory of Money

Quantity Theory of Money Concept: Quantity Theory of Money (also designated by Quantitative Theory of Prices) is a theory for determination of…

Quantity Theory of Money Concept

Quantity Theory of Money (also designated by Quantitative Theory of Prices) is a theory for determination of the product and the prices’ general level which defends that the prices are determined by the currency offer (this is, by the currency quantity in circulation) and by the currency circulation speed. Quantity Theory of Money was initially formulated by David Hume, in the 18th century, and defended that the prices vary proportionally with the currency quantity ion circulation, which forces, naturally, that the currency speed be constant. More recently, the monetarist chain led by Milton Friedman, adopts a more prudent approach, defending that the currency offer is the main determinant of the nominal product variations.

The Quantity Theory of Money can be expresses in the following equation:

M.V = P.Q
in which V represents the currency speed, P the market prices, Q the quantity of products traded in the economy (being P.Q represents the nominal product) and M the currency quantity.

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