Can someone explain the Quantity theory of money to me in simple terms?

Question

I'm working on some stuff for my economics class and they gave me a link to a site to use, but it's a dead site now.

Any help would be appreciated!

Answer 1

http://www.sparknotes.com/economics/macr...

http://ideas.repec.org/a/aea/aecrev/v70y...

MV = PT

where M is money stock,

V is velocity of circulation,

P is average price level

and

T the number of transactions.

The equation assumes that the velocity of circulation of money is stable (at least in the short term) and that transactions are fixed by consumer tastes and the behavior of firms.

here it is easier

http://tutor2u.net/economics/revision-no...

Answer 2

Quantity theory of money is explzained by the equation

M*V= P*T or, M*V= P*Y

where M is the stock of money suppliesd (currency, ban deposits checkable,etc), V is the average velocity of money or the number of times the same unit of mney (say a $ note) changes hands on an average to facilitate transactions of exchane (buying goods in exchange of money in a givn period of time say a year/ fortnight., P is the general Price level (say the wholesale Price Index) , T is the volume of Transactions and Y the Real volume of Gross Domestic Product or National Domestic Income.

The equation describes an identity. For a given period, the total volume of money used is given by the Money stpck multiplied by its avearge velocity and gives the money value used to conduct transaction. This must be equal to the mpney value of transactions which is given by the volume of transactions multiplied by the average price of goods and services exchanged ( which can also be referred to as the Money vale of the GDP or Domestic Income =Price into Quantity of real income in terms of goods and services produced). This is why this is called the equation of exchange.

From this, it follows that:

- if Y, T and V remains at the same level as it was last year,

but M increases/ decreases by a factor of x then Prices will increase/ decreases by a factor of x.

Since M*V=P*y we can rewrite this as P= M*V/Y

so if money supply M increases by 50%, P will increase by 50%.