In order to get the economic equilibrum, the monetary mass needs to be at a level that permits the free circulation of the production towards the consumption. The price stability in the economy insure that the production will be available according to the existing monetary mass. This is the well known equation of the quantitative theory of money.
A Very Old Monetary Theory
The quantitative theory of money is a monetary theory that was very important when the money was mainly gold and silver.
This theory exclude the interest rates, because at that time, many people were prohibiting the interest as being immoral, which is still the case today with the islamic countries. The Koran forbid to any muslim, even today, to lend or borrow money with interest. The islamic banks have other ways to make money than to charge interest! See book En15.
The quantitative theory of money institutes a relationship between the monetary mass, like gold coins, and its speed of circulation, on one side; on the other side, the equation is balanced by the level of economic activities and the level of prices.
|M * V = P * T|
· M = monetary mass
· V = velocity, or speed of circulation of the money
· P = level of the prices in the whole economy
· T = total of the physical economic transactions or the gross national product.