5.1. Milton Friedman's Theory and Irving Fisher's Equation
Basic principles of the Milton Friedman's monetarist theory assume that Market economy is a self-regulating system. Therefore, a number and role of state regulators is reduced to a minimum. The role of tax, budgetary regulation is excluded or reduced too. The regulating role of a state in economy has to be limited to control monetary circulation. “Monetary impulses” - regular monetary issue - serve as the main regulator having impact on the economic life.
So the money supply is the main determinant.
Money supply influences the rate of expenses undertaken by consumers and firms. Increase in the money supply results in growth of production output, and after full capacity utilization – in growth of prices and inflation. Inflation has to be suppressed through every possible means. When choosing the money growth rate, we shall refer on "mechanical" money growth rules (the level of expected inflation and output growth rate).
Below we try to interpret these provisions using the terms of crypto-economy:
М – total nominal amount of money supply in circulation;
V – velocity of money (number of times that money changes hands within one year);
Р – average weighted prices for finished goods and services;
Q – quantity of product in real terms.
It is possible to draw quite a simple conclusion based on this equation, namely that stock of money in circulation is directly proportional to the volume of product/service or economic value of projects implemented on this platform.
Based on these simple principles, we hope to avoid the mistakes that are typical for some currencies – uncovered growth of money supply resulting in the reduced velocity, i.e. loss of liquidity, as well as depreciation of currency because an increase in money supply doesn't lead to growth of production output.