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Economics: An A-Z Guide by Matthew Bishop

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Q

Q theory

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Quantity theory of money

The foundation stone of MONETARISM. The theory says that the quantity of MONEY available in an economy determines the value of money. Increases in the MONEY SUPPLY are the main cause of INFLATION. This is why Milton FRIEDMAN claimed “inflation is always and everywhere a monetary phenomenon”.

The theory is built on the Fisher equation, MV = PT, named after Irving Fisher (1867–1947). M is the stock of money, V is the VELOCITY OF CIRCULATION, P is the average PRICE level and T is the number of transactions in the economy. The equation says, simply and obviously, that the quantity of money spent equals the quantity of money used. The quantity theory, in its purest form, assumes that V and ...

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