quantity theory of money business definition

The economic theory that price inflation is directly related to changes in the quantity of money in circulation. According to the theory, an increase in the money supply will place upward pressure on the prices of goods and services, but will have a limited impact on employment and output. Assumptions underlying the quantity theory of money have changed over the years, and current adherents generally believe the Federal Reserve should refrain from policies that result in sudden increases or decreases in the money supply. Rather, the Fed should gradually increase the supply of money to accommodate real economic growth.