Quantity theory of money.

The idea that money supply times how fast money circulates equals the price level times real output, linking money growth to inflation.

Drafted with AI assistance. Not yet reviewed by a person · Last updated August 23, 2026

Source: Board of Governors of the Federal Reserve System

In plain English

The theory is built on an identity, MV equals PQ, where M is the money supply, V is velocity, P is the price level, and Q is real output. As an identity it is always true by construction. It becomes a theory when someone assumes velocity and real output are roughly stable, which turns money growth into the direct driver of inflation. That assumption is the contested part, since velocity has moved a great deal in practice. Most economists treat the relationship as a long-run tendency rather than a short-run rule.

Most useful ages

20 to 70

01Why it matters

This is the reasoning behind the claim that printing money always causes inflation, and knowing the assumption it rests on lets you judge when that claim actually applies.

02The math, step by step

Say M is $800 billion, V is 2.5, and real output Q is $1,000 billion. MV is 800 times 2.5, or $2,000 billion. Divide by Q to get P, a price index level of 2.0. Double M to $1,600 billion with V and Q unchanged, and P doubles to 4.0.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

Do not confuse with A guarantee that money growth causes immediate inflation

The equation is an identity, not a prediction. Inflation only follows money growth automatically if velocity and real output hold steady. When velocity falls as money grows, prices can stay flat, which is exactly what the identity allows.