Quantity theory of money

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The quantity theory of money is a classical theory relating the price level to the money supply. It states that the level of prices is proportional to the quantity of money in circulation. The more money in circulation, the higher the prices, in direct proportion to each other.

In other words, this theory holds that a given percentage increase in the money supply will cause an equal percentage increase in the price level.

Assumptions include a constant income velocity of circulation of the money, and a constant quantity of goods and services. Full employment, or a tendency towards full employment, is also assumed.

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