## Quick Reference

The theory that the price level is proportional to the quantity of money. This is expressed by the quantity equation, *MV* = *PT*, where *M* is the quantity of money, *V* is the velocity of circulation, *P* is the price level, and *T* is the volume of transactions. The quantity theory assumes that *T* is determined by supply-side forces, which determine the level of real output, and institutional factors, which determine the ratio of total transactions to output; and *V* is determined by the legal status and operating habits of the financial system. These assumptions allow *T* and *V* to be treated as fixed. The quantity equation then implies that *P* must be proportional to *M*. This reasoning supports the assertion of Milton Friedman (1912–2006) that inflation is caused by increases in the money supply. If *T* and *V* are not taken as fixed the direct link between money and prices is lost and a broader range of economic considerations enters the analysis.

*Subjects:*
Economics.