Economic TRUE/FALSE/UNCERTAIN?

The Quantity Theory of Money says:

MV = PQ

http://en.wikipedia.org/wiki/Quantity_theory_of_mo...

So if Q, the real production of the economy increases, then at least one (but maybe all) of the following:

- P (prices) will fall

- M (quantity of money) will increase

- V (velocity of money) will increase

With no additional information you can't say more.

In an economy with no debt, no hoarding, and all money in the form of gold or silver coins, M can't change much, so prices will likely fall:

http://en.wikipedia.org/wiki/The_Great_Deflation

On the other hand, if people can easily buy goods on credit, an increase in real GDP goes hand in hand with major inflation: a rise in prices (inflation), a rise in the supply of money (lots of debt), and a rise in the velocity of money (people spend more quickly). This is what we saw during the boom years leading up to the bursting of the housing bubble.

http://en.wikipedia.org/wiki/Demand-pull_inflation

All in all, it makes the Quantity Theory of Money useless for any sort of prediction (in itself) about prices.

http://mattrognlie.com/2011/05/03/is-mvpy-useful/

http://worthwhile.typepad.com/worthwhile_canadian_...

http://macromarketmusings.blogspot.com/2011/05/is-...