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MENTAL MODEL · M3504

Quantity Theory of Money

Quantity Theory of Money
BusinessHigh supportMonetary Economics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

A classical monetary theory stating that the price level is directly proportional to the money supply, expressed by the equation MV=PY (money supply × velocity of money = price level × real output). In the long run, the velocity of money and real output are relatively stable, so the price level depends mainly on the money supply.

SCAFFOLDING EFFECT

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Inflation analysis tool. It provides a theoretical framework for understanding the monetary roots of inflation. In monetary policy, it supports controlling the money supply to maintain price stability, but also notes that in the modern financial system, the money creation mechanism is more complex and requires comprehensive consideration of multiple factors.

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Classic formula MV=PQ: when the velocity of money V and output Q are relatively stable, the money supply M determines the price level P; it is the basis for monetary neutrality and inflation analysis.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Quantity_theory_of_moneyZH · Explicit
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