IRVING FISHER: THEORY OF MONEY

Fisher's theory of money, also known as the quantity theory of money, is a monetarist theory that suggests a direct relationship between the supply of money in an economy and the level of prices. The theory was developed by American economist Irving Fisher in the early 20th century.

According to Fisher's theory, the total amount of money in circulation in an economy (M) multiplied by the velocity of money (V) is equal to the total value of goods and services produced (P) multiplied by the average price level (T), expressed as the equation of exchange: MV = PT.

Fisher argued that if the velocity of money and the level of production remain constant, then any increase in the money supply will result in a proportional increase in the price level. Conversely, a decrease in the money supply will lead to a corresponding decrease in the price level.

Fisher also believed that changes in the money supply have a more significant impact on the long-run price level than on the short-run price level. In the short run, changes in the money supply can affect output and employment, but in the long run, these effects are temporary, and the price level adjusts to reflect the change in the money supply.

Fisher's theory of money has been criticized for oversimplifying the relationship between money and prices and for assuming that the velocity of money is constant. Nonetheless, it remains an essential concept in monetary economics and has influenced many economic policies, including monetary policy, inflation targeting, and central bank operations.

In other words, if the amount of money in an economy doubles, the general level of prices will also double. This theory assumes that the velocity of money (the speed at which money changes hands) is relatively constant and that changes in the money supply have a proportional effect on the overall price level. 

The theory also suggests that inflation is primarily caused by an increase in the money supply, and that controlling the growth of the money supply is key to controlling inflation.