The Quantity Theory of Money was first derived in the 1600s after a European economist named Henry Thornton noticed that gold and silver from the Americas was causing inflation in Europe. In it's present form can be expressed as the equation of exchange.
MV=PY
M: Money Supply
V: Velocity of Money
P: Price Level
Y: Real Output
MV=PY
M: Money Supply
V: Velocity of Money
P: Price Level
Y: Real Output

But what do each of these terms mean?
Money Supply: The amount of money currently in the economy. There are many different ways of measuring this, with some of the most popular being M0, M1, and M2. Velocity:The rate at which money is spent. For instance, if each dollar is spent twice in a year, the velocity for that year would be 2. Price Level: This is a measure of the average price of goods in an economy. If there is inflation, the price level will rise. Real Output: The total value of all goods and services sold in an economy, irrespective of price. This equation is a simple tautology. Interesting things happen, though, if we hold variables constant. Traditionally, the Quantity Theory of Money assumes that V and Y are held constant in the short term. This means that money is spent at a constant rate, and real GDP doesn't change in the short term. This implies that the other two variables, M and P, are 100% positively correlated; a change in M will lead to an equal change in P. In other words, shortterm inflation is caused by an increase in the money supply. While we know today that V and Y are not generally constant even in the short term, this formula does show that a growth in the money supply is likely to lead to at least somewhat of an increase in prices. This formula is an extremely important concept in the field of economics and will be used extensively throughout your economic education. It is used in explaining exchange rate fluctuations, inflation, the ISLM Model, and countless other applications. 