A framework for comprehending price variations in connection to the availability of money in an economy is the quantity theory of money.
It contends that inflation is caused by a rise in the money supply and vice versa. The idea is most frequently put into practise using the Irving Fisher model.
According to the quantity theory of money, changes in price are correlated with changes in the amount of money in circulation. It is a crucial tenet of the monetarist economic theory and is most frequently formulated and taught using the equation of exchange.
The equation is:
M×V=P×T
where:
M=money supply
V=velocity of money
P=average price level
T=volume of transactions in the economy
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