Quantity Theory of Money
The oldest idea in macro: money growth and inflation in the long run.
The Quantity Theory of Money model, in writing
Definition
The classical link between money and prices: money times the speed it circulates equals the price level times output, so with stable velocity and full-employment output, money growth becomes inflation.
M·V = P·Y ; %ΔM + %ΔV = %ΔP + %ΔY
The intuition
If the money supply doubles but the economy produces the same real output, twice as many dollars chase the same goods and prices eventually double. This holds impressively well across countries and decades for high inflations; it slips in the short run, when velocity moves and output responds.
Exam tip
Use the growth-rate form: inflation ≈ money growth minus real output growth (with V stable). State the assumptions (stable V, Y at potential) or you have not answered the question.
Related models in Macro Foundations