The monetarist theory is a form of economic analysis which suggests that money supply is the most important factor for determining the rate of economic growth. Monetarists adhere to the MV=PQ formula or the Quantity Theory of Money, which states that the money supply times the velocity of circulation is equal to the price times the quantity of goods and services produced in an economy. This implies that increases or decreases in the money supply have an impact on the general price level in the economy by changing the demand and supply ratio.

Monetarist theories propose that changes in monetary policy can incentivize economic growth and reduce inflation. According to monetarists, increases in money supply lead to more spending in the economy and therefore higher growth. As people are able to access more money, they are more likely to invest and consume. This leads to a situation of increased aggregate demand (AD) in the economy. Thus, an increase in money supply is seen as a way to stimulate economic growth.

Conversely, monetarists claim that decreasing money supply or raising borrowing cost through interest rates can reduce inflation due to the reduced aggregate demand (AD). When less money is available for circulation, fewer goods and services can be purchased and hence prices will drop.

The Federal Reserve controls money in the United States, and it uses three main levers—the reserve ratio, discount rate, and open market operations—in order to increase or decrease money supply in the economy. The reserve ratio refers to the percentage of bank deposits which banks must keep on reserve and cannot lend. The discount rate is the interest rate which the Federal Reserve charges to member banks when borrowing from the Federal Reserve Bank. Open market operations refer to the buying and selling of government securities by the Federal Reserve in the open market, in order to regulate money supply.

In conclusion, monetarists argue that increasing or decreasing money supply can affect economic growth or inflation. The Federal Reserve's use of the three levers—the reserve ratio, discount rate, and open market operations—can manipulate the money supply in order to facilitate economic growth or reduce inflation in the economy.