Quantity Theory of Money

Let M = money supply

Let P = price level

Let Q = output of the economy

Let V = income velocity of money

Assume: MV = PQ

Note: V = PQ / M

Let V be fixed or relatively stable in the long run

Let Q be fixed in the long run at full-employment

Therefore: Any change in the money supply, m, will result in a proportional change in the price level, p.

What if the real economy (output, Q) is growing at a 3% annual rate?