Road Map In this chapter, we study the causes and consequences of inflation. Times of rapid inflation are especially helpful for understanding inflation in general. When inflation is the dominant feature of an economy, it is very easy to isolate the main forces at work. We will see, moreover, that the most interesting periods to study are the beginning and end of large inflations, for such times provide a particular insight into the connection between fiscal policy and monetary policy. We first study the relationship between the inflation rate and changes in the amount of money circulating in an economy and explain that, in the long run, there is a close connection between the inflation rate and the growth rate of the money supply. We look at some data both for the United States and for other countries and examine some examples of hyperinflation. Then we explore the underlying cause of hyperinflations, which turn out to be connected to the tax and spending choices that governments make, and we conclude by discussing government policy to control inflation.
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