The quantity theory of money explains the link between inflation and money growth.

a. The equation of exchange tells us that:

i. The quantity of money times the velocity of money equals nominal GDP.

ii. Money growth plus velocity growth equals inflation plus real growth.

b. If velocity and real growth were constant, the central bank could control inflation by keeping money growth constant.

c. In the long run, velocity is stable, so controlling inflation means controlling money growth.

d. In the short run, the velocity of money is volatile.