This is a theory that explains the relationship between the money supply (M) and the general price level (P) in an economy. In its original form, money supply was the only determinant of price as both vary directly I.e. The higher the supply of money (M), the higher the general price level (P). The basic identity underlying the quantity theory of money was first developed by Irving Fisher in 1911 by introducing two other variables velocity of circulation of money I.e. The average number of times or the rate at which money changes hands in financing transactions during a year (V) and the number of transactions or the total amount of goods and services supplied (T).

The Fisher equation states that: MV = PT

Where: M = stock of money in circulation,

V = velocity of circulation,

P = general price level and

T= total volume of transactions.

                         The above relationship is true. By definition because the total money expenditure on goods and services (MV) in a given period of time must be equal to the value of goods and services produced (PT). Fisher explained that it is only when V and T are held constant that M and P can vary in a direct proportion.

For example, if the total value of all transactions (PT) during the year is 10 million CFA and the supply of money (M) in circulation is 2. 5 million

CFA, then the velocity of circulation (V) must be 4.

This means that each 1000 CFA of the stock of money purchased 4000 CFA worth of goods and services on average in a year, or each 1000 CFA has changed hands 4 times on average in a year.

                           The quantity theory of money or equation of exchange (MV=PT) is simply a statement of fact, hence, a truism. It is not a theory because nothing has been mentioned about the causes of changes in the various variables m, V, P and t. it becomes a theory only when an assumption is made on V and T. If V and T are assumed to be constant, there will be a direct relationship between the supply of Money (M) and the general price level (P). For example, if V and T are constant, an increase in M will lead to an increase in P and a fall in the value of money and vice versa.

However, a lot of development has been done on the model in an attempt to explain-the role of changes in supply of money as a determinant of changes in output and prices.