Macroeconomics is the branch of economics that studies the economy as a whole.

Governments turn to
macroeconomics when budgeting spending, creating taxes, deciding on interest rates, and making policy
decisions. Macroeconomic analysis broadly focuses on three things—national output (measured by
gross domestic product), unemployment, and inflation. One of the principles of economics that
specifically relates to macroeconomics is that prices rise when the government prints too much money.

The rate at which the value of the currency falls or the purchasing power of a given currency declines
over time, and consequently, the general prices of goods and services rise is known as Inflation. Inflation
is primarily measured in two ways: through the Consumer Price Index (CPI) and the GDP deflator. The
CPI gives the current price of a selected basket of goods and services that is updated periodically. The
GDP deflator is the ratio of nominal GDP to real GDP. If nominal GDP is higher than real GDP, we can
assume the prices of goods and services have been rising. One of the important causes of inflation is the
growth in the quantity of money. When the government creates large quantities of money, the value of
the money falls.

One simple example to understand is that suppose the economy produces 1,000 units of output.
Moreover, let the money supply (number of notes and coins) = $10,000. This means that the average
price of the output produced will be $10 (10,000/1000). Suppose then that the government print an
extra $5,000 notes creating a total money supply of $15,000; but, the output of the economy stays at
1,000 units. Effectively, people have more cash, but, the number of goods is the same. Because people
have more cash, they are willing to spend more to buy the goods in the economy. Ultimately, the price
of the 1,000 units will increase to $15 (15,000/1000). The price has increased, but, the quantity of
output stays the same. People are not better off, and the value of money has decreased; e.g. A $10 note
buys fewer goods than previously.