The Quantity Theory of Money

Simply put, the quantity theory of money is the idea that the supply of money in an economy determines the level of prices and changes in the money supply result in proportional changes in prices. In other words, the quantity theory of money states that a given percentage change in the money supply results in an equivalent level of inflation or deflation. This concept is usually introduced via an equation relating money and prices to other economic variables, as shown by the following setup: