Note: This is post #106 in a weekly video series on basic economics.
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to the theory, if the amount of money in an economy doubles, price levels also double, causing inflation. The consumer, therefore, pays twice as much for the same amount of the good or service.
In this video by Marginal Revolution University, Alex Tabarrok explains why this is an important tool for thinking about issues in macroeconomics.
(If you find the pace of the videos too slow, I’d recommend watching them at 1.5 to 2 times the speed. You can adjust the speed at which the video plays by clicking on “Settings” (the gear symbol) and changing “Speed” from normal to 1.25, 1.5 or 2.)
Click here to see other videos in the Introduction to Economics series.