Glossary – Quantity Theory of Money

Definition

A hypothesis that argues that changes in prices are influenced by changes in the size of the money supply.

 

Example

When money supply in an economy increases, prices tend to rise as well. If people have more money, they can afford to consume more goods and services. Because of that, the demand for available goods increases, which results in higher prices (as consumers compete for the goods).

 

Relevance

It is important to note that having more money does not necessarily mean people are actually becoming more wealthy. If prices increase at the same rate or at a higher rate than money supply, people may actually end up with less purchasing power. In other words, the amount of money in an economy also determines its value.

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