According to quarter data of GDP, M1 and nominal interest rate from 1994 to 2006, we can achieve long- term currency de- mand function of China by estimating methods of cointegration test and regression coefficient, correspondingly, empirically analyze social welfare cost of our inflation. The analysis shows that our country's higher inflation rate will bring greater welfare cost. Hence, during the period of heavy inflation pressure, the government will take appropriate macro- controlling measures to keep the inflation rate under 3 percent.

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