Empirical methods Prescriptive and policy Monetary inflation is a sustained increase in the money supply of a country (or currency area).
Depending on many factors, especially public expectations, the fundamental state and development of the economy, and the transmission mechanism, it is likely to result in price inflation, which is usually just called "inflation", which is a rise in the general level of prices of goods and services.
So there is a great deal of debate on the issues involved, such as how to measure the monetary base and price inflation, how to measure the effect of public expectations, how to judge the effect of financial innovations on the transmission mechanisms, and how much factors like the velocity of money affect the relationship.
However, there is a general consensus on the importance and responsibility of central banks and monetary authorities in setting public expectations of price inflation and in trying to control it.
where M is the money supply, V is the velocity of circulation, P is the price level and T is total transactions or output.
As monetarists assume that V and T are determined, in the long run, by real variables, such as the productive capacity of the economy, there is a direct relationship between the growth of the money supply and inflation.