Quantity theory of money

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Summary

The quantity theory of money (QTM) is a hypothesis within monetary economics which states that the general price level of goods and services is directly proportional to the amount of money in circulation, and that the causality runs from money to prices.

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mathematical expression of the quantity theory
The equation MV=PQ serves as the formal mathematical foundation for the quantity theory of money, relating money supply, velocity, price level, and output.
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early contributor to the theory
As a member of the School of Salamanca, Azpilcueta provided one of the earliest formulations of the quantity theory of money by observing the price revolution in 16th-century Spain.
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the theoretical framework linking money supply to price levels
This theory posits that the general price level of goods and services is directly proportional to the amount of money in circulation, making money supply a central variable in inflation.
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phenomenon explained by the quantity theory
The quantity theory of money provides a primary explanation for inflation, suggesting that excessive growth in the money supply leads to a general increase in price levels.
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reviver of the theory in modern economics
Friedman was the leading figure of the Chicago School of Economics who restated the quantity theory of money in the 1950s, arguing that inflation is always a monetary phenomenon.
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popularizer of the theory in the 20th century
Fisher formalized the quantity theory of money in his 1911 work 'The Purchasing Power of Money', providing the modern mathematical framework used today.
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modern school of thought based on the theory
Monetarism is a macroeconomic school of thought that emphasizes the role of governments in controlling the amount of money in circulation, directly building upon the quantity theory.
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pioneered by School of Salamanca members
Martín de Azpilcueta and other scholars observed that the influx of precious metals from the Americas caused inflation, forming the basis of the quantity theory of money.
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theoretical framework explaining the event
The Price Revolution serves as the historical case study that helped validate the quantity theory of money, which posits that price levels are directly proportional to the money supply.
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economic theory pioneered by School members
Members of the School, particularly Martín de Azpilcueta, formulated early versions of this theory to explain the inflation caused by the influx of precious metals from the Americas.
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institutional home of the theory's revival
The Chicago School is famous for its strong advocacy of the quantity theory of money, particularly through the work of Milton Friedman and his colleagues.
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theoretical implication of the quantity theory
The quantity theory often assumes the neutrality of money, which posits that changes in the money supply only affect nominal variables like prices rather than real variables like output.
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key variable in the quantity theory
The velocity of money represents the frequency at which a unit of currency is used to purchase goods and services, a critical component in the quantity theory equation.
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economic theory pioneered by the author
Mercado was one of the first economists to articulate a version of the quantity theory of money, observing the inflationary effects of precious metals flowing from the Americas into Spain.
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pioneering economic theory development
Covarrubias, alongside Martín de Azpilcueta, developed early formulations of this theory by observing the inflationary effects of precious metals flowing from the Americas.
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early developer of the theory
Soto provided early insights into how the influx of gold and silver from the New World affected price levels, a core component of this economic theory.
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Facts