What is "quantity theory of money"

n. the theory that changes in prices and the value of money vary with changes in the amount of money in circulation

In monetary economics, the quantity theory of money (QTM) states that money supply has a direct, proportional relationship with the price level. For example, if the currency in circulation increased, there would be a proportional increase in the price of goods.

The theory was challenged by Keynesian economics, but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.

Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.