Upon the breakout of the Pacific War(December 1941),the United States began to provide military assistance to China under the"Lend-Lease Act".However,the US defaulted the payment for their staff dispatched to and stationed in China which was over 40%of Chinas total military expenditures,forcing the Chinese government to make huge sum of advance payments,thus worsening Chinas fiscal conditions and monetary stability.Since the beginning of 1937,the total price indices increased only 200%in 1941 but jumped to 1600 times at the end of the war.Because of the war,the Nationalist government had to sought seigniorage through inflationary monetary policies to finance her outstanding fiscal deficit from 1.5 billion fabi yuan in 1937 to 685.4 billion fabi by 1945.The American military spending accounted for over 10%of the note issue in wartime China.I develop a dynamic Fiscal Theory of Price Level(FTPL)to capture the relationship between fiscal shocks and money supply.My DSGE model displays remarkable power in explaining the historical facts.The main message that the model delivers is that seigniorage(fiscal demand)driven inflationary monetary policy can lead to some hyperinflation that can be predicted and quantified.1 then empirically examine the relationship between fiscal expenditures and inflation levels using provincial panel data 1937-1945.The estimation results show that local price levels increased 7.8%for every 10%increases of Chinas advance payment for US troops.