Online course on the Real Incomes Approach to Economics

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The Quantity Theory of Money (QTM)

This short slide sequence explains why the Quantity Theory of Money (QTM) has no utility as an identity to explain the relationship between money volumes and average prices of goods and services. As is well known, the most widely used version of the QTM was developed by Irving Fisher and it is as follows:
M.V = P.Y

Where: M is the volume of money in circulation; V is the velocity of money; P is the average price of goods and services and Y is the real income used in transactions.

As can be seen this identity suggests that a rise in M can be associated with a rise in prices (P) associated with a fall in real income (Y) or a fall in unit prices (P) and a rise in real incomes (Y) or a rise in both P and Y.