What is the quantity theory of money ?

Economy and Finance

What is the quantity theory of money ?

10 Aug 2023 Zinkpot 345

The quantity theory of money shows the relationship between the money supply and the prices of goods and services in the economy. In other words, this theory states that the quantity of money will determine the value of money.
It states that a percentage change in the money supply may give rise to equivalent inflation or deflation i.e. rise or fall in the prices of goods and services in the market.
The quantity theory of money depends on the simple fact that if people have more money, they will want to spend more and that means more people will bid for the same goods/ services, which will cause the price to shoot up.
According to this theory, the amount of money in the economy gets doubled up then the price level also doubles. It means that the customers will have to pay twice as much for the same amount of goods and services causing inflation.
The quantity theory of money also assumes that the quantity of money in an economy has a large influence on its level of economic activity.
It also portrays that an increase in the supply of money decreases the marginal value of money. In other words, when the money supply increases, but with all else being equal, the buying capacity of one unit of currency decreases. This theory was provided by an American economist, Irving Fisher.
As a way of adjusting for this decrease in money’s marginal value, the prices of goods and services rise. This results in a higher inflation level.
While considering solutions for a staggering economy in need of an increased level of production, some monetarists may recommend an increase in the money supply as a short-term boost. Monetarists believe in the practice of controlling the supply of money, as the chief method of stabilizing technology.
On the other hand, many Keynesian economists remain critical of monetarism and challenge the assertion that regulation of money supply is the best way to address economic growth.