1) Inflation is caused by printing money faster than producing goods and services, which leads to rising prices. The quantity theory of money states that the money supply determines the price level. 2) There are costs to inflation including uncertainty, redistribution of wealth from lenders to borrowers and from those in lower tax brackets to those in higher tax brackets due to tax bracket creep. 3) The aggregate demand-aggregate supply model views the economy as determined by the interaction of demand and supply forces, showing how the price level and real GDP are determined in the short-run and long-run.