Quantity Theory of Money. Why should the Quantity Theory of Money (QTM) be Introduced?. The QTM can be viewed as a special case of the economic theory behind the LM curve.
m – p = y,
where m is the % change in M,
p is the % change in P, and
y is the % change in Y.
(Note that the growth rate of k must be zero because it is a constant.)
Alternatively, p = m – y, i.e., inflation is positively related to growth rate in money supply and negatively related to output growth.
MV = PY, where V is the velocity of money. It is supposed to measure how often the money stock turns over in each period. Alternatively, we can write V = nominal GDP/nominal money supply, i.e., V = PY/M.
MV = PY should be treated as an identity, rather than an equation, because by the definition of V, it must always true. When there are changes in M, P, or Y, then V may have to adjust.