If the money supply grows by more than real GDP growth, inflation is likely (taken from wiki). Inflation almost naturally occurs with the interaction of money and interest rates. Prices and wages always tend to rise, not fall, in a healthy economy. Workers usually demand more pay, and businesses usually increase the price of their goods, both for profit and for paying their workers. The money supply has to be adjusted to compensate for this...otherwise, there won't be any money to pay for additional goods and services that come from GDP growth. However, as you said, inflation is like a "hidden tax" because it diminishes the purchasing power of the money you have now. But remember, inflation applies to prices
and wages. So a little inflation is a good thing, but too much is a very bad thing.
The Fed tracks M0 (all hard currency in circulation) and M1 (M0 + highly liquid electronic accounts that consumers use, like checking accounts) as well as other liquidity classes of money that make up the total money supply. They try to keep it on pace with GDP growth. I'm pretty sure that banks are required to report their total deposits and electronic deposits to the Fed on a regular basis. The Fed controls the money supply by adjusting interest rates and buying/selling government securities on the open market. They don't just give money away to banks. Lower rates make borrowing more attractive, and loans increase the money supply. Banks can "create" money because of fractional reserve requirements. They can effectively loan out more than what they have in hard currency deposits. When the government buys securities, it pumps money into the economy for lending, and this increases the money supply.
If the money supply is growing too fast (which could lead to inflation), the Fed increases the prime rate and the federal funds rate, and borrowing slows down. When the govt. sells securities, they take money out of the economy that could be loaned out by banks. They can also print money, either to put new money into the economy (via buying securities) or to replace old currency. The Fed can also mess around with the depository requirements, but that's a heavy-handed measure that isn't used too often.
Wiki has a pretty good article on it:
http://en.wikipedia.org/wiki/Money_supply
WRT business school....one of my econ professors said that the business school just takes economics and keeps all the sexy parts, so they can make money doing it. My business school alma mater did away with some of its econ requirements not too long ago, which is very sad IMO. Lucky for me, I took enough econ credits to unofficially minor in it....FWIW.
ScottieK