AP MacroeconomicsMoney & Monetary Policy
Quantity Theory of Money
A theory stating that the general price level of goods and services is directly proportional to the amount of money in circulation.
It is expressed by the equation MV = PQ, where money supply times velocity equals price level times output. The theory assumes velocity and output are stable in the long run, so changes in money supply primarily affect prices, not real output.
Formula / Example
MV = PQ