Early economists were trying to understand the governing principles explaining how economies function. One of the most important and early issues was determining the role of money in the economy. The first view about money was that money is not one of the wheels that move the economy; rather, it is the oil that helps the wheels turn easier.1 As stated in Chapter 1, the equation of exchange per se is an identity, not a theory. What makes it into a theory is the assertion, or claim, depending on one’s normative conviction, that changes in the supply of money cause changes in the price level. Assuming this is true, the manipulation of the supply of money to change prices is known as monetary policy, that is, ...
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