Quantity theory of money
Also called: Fisher equation of exchange, MV = PT · Topic: Money: From Barter to Digital Currency · NCERT: Beyond NCERT
Meaning
The quantity theory of money says that if velocity and output stay constant, the price level changes in the same proportion as the money supply. More money chasing the same goods pushes prices up. Fisher's equation of exchange writes it as MV = PT. Here M is money supply, V is velocity (how many times each rupee changes hands in a period), P is the price level and T is the volume of transactions. The Cambridge cash-balance version writes it as M = kPY. Here k is the share of income people hold as money, Y is real output, and V = 1/k.
Example
India's income velocity is nominal GDP ÷ M3. In 2024-25 this was about ₹331 lakh crore ÷ ₹272.87 lakh crore, or about 1.2. Velocity has fallen over time as financial deepening has raised the ratio of M3 to GDP. This shows that V is not always constant in practice.
Don't confuse with
- Fisher equation (interest rates): this links the nominal interest rate, the real interest rate and inflation. It is a separate idea by the same economist, not the equation of exchange MV = PT.