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This paper dwells on the relations between money supply and economical growth, inflation, asset prices theoretically and empirically, and also reveals the co-relationship between money supply and economic growth, inflation, asset prices through positive test, further implies the applicability of "Friedman Hypothesis" in China. Based on China’s actual conditions, this paper analyses the relations between money supply and economic growth, inflation, asset prices, trying to find out the reasons for inflation, and measures to curb it as to guaranteeing the rapid and healthy development of our economy. After analysis of impulse response function and Cholesky squared variance, it reveals the short-term positive effect to economic growth by rising CPI, but on the long term, the negative side effects looms. On the other hand, rampant economic growth also drives up CPI, these two interacts each other. Only a proper trade-off can lead to "low inflation, high development". In other words, inflation helps economic growth, but later on it hinders the growth, i.e. fighting inflation costs much. Furthermore, To some extent, inflation is caused by the excessive money supply. Because the increasing currency will chase relatively limited product, thus inevitably pushing prices, causing inflationary pressures. In addition, the money supply is of high co-relationship with economic growth, when looking into the pulse results, the change shock of M2 would push economic growth rapidly at the beginning, and then gradually slow down. This evidences "Tobin effect" of China’s money supply for economic growth.Finally, based on theorical and positive results, we put forward corresponding policy recommendations: (1) To strengthen the control over M2 growth rate, in-depth study of factors impacting money supply, along with monetary and fiscal policy, curb on sudden big capital in and out-flow, and accurate control of monetary policy’s direction and intensity. (2) Improve and strengthen macro-control, curb excessive prices and rising asset prices, increase subsidies to low-income families, increase the direct subsidies to farmers growing grain, so that farmers get real benefits from the grain price, at the same time maintaining the stability of prices. (3) Improve China’s statistical methods for CPI. It should increase the transparency, to adjust method, and other relevant information, thereby enhancing Monetary policy credibility. (4) Establish a regulations and systems for capital market, and regulate the securities market, then positive development of the financial derivatives markets.(5) Liberalization of prices, structural adjustment and let the market mechanism to play a real role in regulating.(6) To further expand domestic demand and increase domestic investment and reduce dependence on exports.
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