The period between 1965 and 1985 is known as the Great Inflation, characterized by high inflation and high volatility of income and employment. The following twenty years are known as the Great Moderation, with low inflation and low volatility of income and employment. In this chapter, we examine the main theories of inflation. First, we consider the cash-in-advance version of the standard model in which a legal restriction forces traders to pay in cash for their purchases. The model gives rise to the quantity theory of the price level, in which expansionary monetary policy is responsible for creating inflation. Then, we examine the so-called fiscal theory of the price level, whereby fiscal deficits are responsible for creating inflation.