The Quantity Theory Inflation sometimes is defined informally as “too
much money chasing too few goods.” This statement
captures important aspects of why money growth is
related to inflation. Still, it is better to define inflation
as increases in the general level of prices rather than in
terms of why increases in the general price level occur.
The relationship between inflation and money
growth ultimately is based on the demand for money and
the supply of money. There are many different empirical
measures of money, and the best measure is a matter of
dispute.3 Still, money today generally is measured as the
sum of currency and deposits in financial intermediaries
that are used in exchange and also may include deposits
that are close substitutes for currency or for deposits that
are directly usable in exchange. For example, the commonly
used measure of money in the United States is
called M2, estimated to be $4.4 trillion for February 1999
(Board of Governors 1999).