Inline functions allow function code to be expanded at the point of call at compile time for improved performance. They are declared with the "inline" keyword and behave like regular functions but with type checking and argument evaluation. Macros are preprocessor directives that perform simple textual substitution and lack type checking, so they are more error prone than inline functions. The key differences between inline functions and macros are that inline functions are parsed by the compiler while macros are expanded by the preprocessor, and inline functions support features like debugging that macros do not.