Quantity Theory of Money
Definition
The Quantity Theory of Money states that the general price level in an economy is directly proportional to the amount of money in circulation. In simpler terms, when there is more money circulating in the economy, prices tend to rise.
Analogy
Imagine a pizza party where there are only a few slices of pizza for many hungry people. As more pizzas are brought in, the price per slice increases because everyone wants a piece. Similarly, when there is more money circulating in the economy, prices increase because people have more purchasing power.
Related terms
Inflation: The general increase in prices over time due to a decrease in the value of money.
Money Supply: The total amount of money available within an economy at a given time.
Aggregate Demand: The total demand for goods and services within an economy at different price levels.
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