if money supply increases faster than real output then inflation will occur.

quantity theory explains this connection with the formula MV=PY


simple example is

1.suppose economy has 1000 units of output.

2.suppose money supply(no. of coins and notes)=10000 rupees

thiss means that the average price of the output produced will be 10000/1000=10 rupess.


now suppose that government print an extra 5000(notes/coins) creating a total money supply of 15000. but the output of the economy stays at 1000 units.now people have more money at hands but the no. of goods are same.because people have more cash they are willing to spend more to buy the goods in economy.

the price of 1000 units will increase to 15 rupees.(15000/1000) and the value of money has decreased.e.g a 10 rupees note buy less goods than before

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