What is the theory of the amount of money?
The amount of money states that inflation is increasing in the economy when the total amount of money increases. This inflation theory attempts to assign the actual value of money and explain why the price of items rises when items physically remain the same as Gallon (3.8 liters) milk. This theory has existed for centuries and has suffered a turbulent history among economists. Many of them see this as a simple solution to this question, but many others criticize the theory.
It was assumed that the theory of the amount of money originated during the 16th century. This was a direct response to price increases due to the influx of gold and silver from America in Europe. At the beginning of the 18th century, economist Henry Thorton created what was considered to be a definitive statement about the monetary economy. In essence, his theory stated that the more money enters into the economy, the higher the inflation and that the increased cash supply does not necessarily lead to increased economic production.
As far as economic theories are concerned, the theory of money is one of the simplest understood. An example would be that if the amount of money in the economy doubles, the prices will eventually double. This is explained because, as more and more money is brought to the economy, it becomes much less rare, so it loses its initial value. In most economies, this creates a cycle, because the goal is to add income to the system, but the value of money decreases and creates a greater need for income, etc.
The amount of money was explained by means of a simple equation that can be applied to many different economies. Mathematical formula M*V = P*T is accepted as a basic equation, as the money supply concerns monetary inflation. Letter m is worth money; V means speed or how many times after Money replace hands; P means an average price level; and t means the volume of transactions.
This economic theory has many followers who agree that this simple solution is PŘesná, but because Thorton published his thoughts, they were critics. Regarding the work of a well -known economist of the 20th century, John Maynard Keynesse, many said that speed is unpredictable and therefore cannot be measured precisely. Many also see that the theory of the amount of money is the exact judge of the long -term economy, but a bad break of short -term finances.