The Quantity Theory of Money

The quantity equation of exchange:

M × V = P × Y

where

M is the quantity of money

V is the velocity of circulation of money

P is the average price level

Y is real output.

If money neutrality holds, then an increase in the money supply, M, will not affect Y, real output, or the speed with which money changed hands, V, because if real output is unaffected, there would be no need for money to change hands more rapidly.

Monetarists argue that the price level, or at least the rate of inflation, could be controlled by manipulating the rate of growth of the money supply.