What is the Quantity Theory of Money?
This theory states that there is a direct relationship between the amount of money in an economy and the level of prices of goods and services sold (inflation). More money equals more inflation.
To calculate QTM:
M: Money Supply
V: Velocity of Circulation
P: Average Price Level
T: Volume of Transactions of Goods and Services
Total Spending= Amount of Money x Velocity of Circulation
If an economy had $3, and those $3 were spent 6 times in a month, the total spending for the month would be $18.
I believe this is an important topic to understand. QTM says that the quantity of money determines the value of money, and this is the basis of monetarism.
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