This chapter teaches the readers about money growth and inflation. It specifically establishes the strong relationship between the rate of growth of money and the inflation rate. It discusses the causes and costs of inflation. Though there are numerous costs to the economy because of high inflation it seems like there’s no clear stand on how important costs are when the inflation is only moderate. Inflation is an increase in the overall level of prices. Deflation is a decrease in the overall level of prices. Hyperinflation is extraordinarily high inflation. Inflation is caused when the government prints too much money. Inflation is more about the value of money than about the value of goods. If P represents price level then 1/P is the value of money measured in terms of goods and services. The value of money is determined by the supply and demand for money. Money supply and money demand need to balance for there to be monetary equilibrium. The quantity theory of money is that (1) The quantity of money in the economy determines the price level, and (2) an increase in the money supply increases the price level. Subtle costs of inflation include shoe leather costs, menu costs, relative-price variability and the misallocation of resources, and inflation-induced tax distortion. Overall, I would give this chapter a difficulty rating of 2 out of 3.
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