What Is Quantity Theory Of Money?

The quantity theory of money was first put forward by Davan Zat in 18th century. It was then taken up by John Locke at the end of this century. According to Irving Fisher and other classical economists, the function of money primarily is to serve as a medium of exchange. Money is demanded for its purchasing power and not for its own sake. As regards the value of money it entirely depends upon the quantity of money in circulation in the economy. Purchasing power of money states that the quantity of money is the prime determinant of its value and hence of its price level.

We can say in other words, that price level is a function of the quantity of money in circulation. The transaction version of the quantity theory states that the changes in money supply other things remaining the same, bring about a directly proportionate change in the price level. Other thin remaining unchanged as the quantity of money in circulation increases, the price level also increasing in direct proportion and value of money decreases. If the quantity of money is doubled the price level will also be double and the value of money will be one-half.