The quantity theory of money proposes that the quantity of money and price levels increase at the same rate in the long run. This concept is demonstrated by the equation of exchange.
The Equation of Exchange
M × V= P × Q = Total Spending or GDP
Where
M – Money supply
V – average no of times per year each dollar used to buy goods & services = GDP/money
P – Price level
Q –real output
As Q and V are constant and change slowly, incease in M (money supply) lead to increase in P (price) propotionally.
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