The equation of exchange is a mathematical statement showing that the MARKET VALUE of all goods and services sold equals the amount of money paid for the goods and services. The equation is MV = PQ, where M is the MONEY SUPPLY, V is the velocity of circulation of money (the number of times that money changes hands during a year), P is the level of prices (in most circumstances, retail prices), and Q is quantity of goods and services sold to final consumers. In the equation of exchange, P times Q is the monetary value of final goods and services—that is, national INCOME. The equation of exchange is used to relate monetary aspects of an economy and ECONOMIC POLICY to output and INFLATION in the economy. The quantity theory of money, developed by Yale economist Irving Fisher (1867–1947), stated that under most circumstances V and Q are constant, and therefore an increase in the money supply will cause an increase in the price level (inflation). Historical data do not support Fisher’s theory. Velocity, while often assumed to be constant, varies over time with changes in technology and CONSUMER BEHAVIOR. The quantity of goods and services sold (Q) also cannot be assumed to be constant. Monetarists, led by Milton Friedman, use the equation of exchange to demonstrate the importance of the money supply in affecting inflation. They assume velocity is constant, at least over short periods of time, suggesting that changes in the money supply result in changes in the price level and/or changes in real output of an economy. Most monetarists believe economies tend toward EQUILIBRIUM at the level of potential real GROSS DOMESTIC PRODUCT; thus, changes in MONETARY POLICY primarily affect inflation. Because of the time lag between a change in the money supply and its impact in the economy, monetarists argue government intervention heightens peaks and troughs of BUSINESS CYCLES, rather than smoothing out variations in the level of economic output. Milton Friedman and many other monetarists suggest establishing a fixed rate of growth in the money supply, thereby eliminating moneysupply changes as an uncertainty in the business environment.