quantity theory of money: a standalone construct

The quantity theory of money holds that, other things equal, the general level of prices in an economy moves in proportion to the quantity of money in circulation. Early statements appear in the sixteenth century: Nicolaus Copernicus observed in his monetary treatise (1526) that money loses value when it becomes too abundant, and Jean Bodin (1568) traced the price rises of his day to the inflow of silver from the Americas, with David Hume (1752) later adding that a change in the money stock affects prices only after a lag. Irving Fisher gave the theory its canonical algebraic form in The Purchasing Power of Money (1911) as the equation of exchange, MV = PT, where M is the money supply, V the velocity at which money changes hands, P the price level, and T the volume of transactions, so that if V and T are stable a rise in M raises P in proportion. Milton Friedman (1970) revived and restated the theory at the center of monetarism, treating the demand for money as a stable function and making the growth of the money supply the principal driver of nominal income and of inflation over the long run. Its scope is macroeconomic: it links a single aggregate, the money stock, to the economy-wide price level, and it remains a reference point for how central banks and economists reason about inflation.[1][2][3][4]

Unit

A macroeconomic proposition linking the money stock to the aggregate price level

Recovery means

Not applicable

Measured by

Assessed empirically by testing whether money-supply growth tracks inflation and nominal income, typically through the equation of exchange MV = PT and estimates of money demand