Your question made me curious about chinese religions and the afterlife in chinese folklore. I've read a lot about it, and what I can say without any doubt is that there is a lot of different interpretations. I was asking myself, why exactly would the living offer money to their ancestors? I've came across two different reasons (I bet there exist more) :
* Going through hell
I found this website the following information :
Other ideas of afterlife were influenced by the Buddhist cosmology of Heaven and hell – the Chinese version of heaven and hell mirrored the bureaucracy of the worldly ruling power with heaven being represented as the wonderful court of the Jade Emperor and hell being represented as the horrible prisons where one was punished by cruel jailers and could possibly get out sooner than one’s sentence required by bribing the guards – hence the practice of sending “spirit money” with the deceased to help with one’s life in the next world. Of course, Buddhist influence also meant that heaven and hell were not permanent places.
The spirit money is used to bribe the guards of hell and suffer less torments. Who would want their family to suffer? In this case the living could burn just enough money to bride the guards. There should be no inflation unless there is a sort of competition between the dead.
(The next point may be the following events after going through hell.)
* Persuading the gods
I found on this website that after death, your dead ancestors could live in the spirit world with the gods. In this world, the gods have the ability to influence the world of the living. Sending money to your ancestors would ease their task of influencing the gods to bring good luck on your family.
Assuming this is true and the gods powers are real, every family would burn all the fake money they could. Now, depending on how the gods are, the price of "good luck" could rise. More people with more money means more demands. If the gods can supply enough good luck to everyone (and have enough time to do so), the price won't rise. Else, if the gods are not everywhere at anytime, they would only accept the biggest offerings and thus, increase their prices.
(There exist a slight variant where ancestors become gods of the Underworld and bring good or bad luck in exchange of offerings. In this case, more money could also mean less need to word and more "free time" for good luck wishes.)
Conclusion : Creating money make it lost its value. Will there be great inflation? Yes! And no... 590
It depends on which version of the chinese folklore you are willing to trust.
To answer your second question, there also could be bartering with the different objects offered by the living. Even though there tend to be less bartering in a society with money.
EDIT : How could the gods spend their money? I didn't find anything about the gods shopping habit. Sorry, the next part will only be speculations.
First, we must know what gods really want. Gods being gods, I don't think they will care about "material goods" that you and me buy at the grocery store. What do gods want? Power! And by power I mean spiritual energy. In several religions, the power of a god depend on how many people worship him. Prayers, sacrifice and offering giving empowering the gods. In the links that I used for this answer, they do not talk about "money", but "spiritual money". This spiritual money could simply be a materialization of power in the Underworld. It could actually means that the gods don't spend their money! They keep it, after all it's the amount of spiritual money they have that increase their powers.
Now with the notion of "amount of power", this could explain the increase in the gods prices for granting wishes and benedictions. The most powerful god with the biggest amount of power (and though the best "good luck" you could get as a living) could sell his services for more than another god less powerful. The economy would stay the same as earlier for the ancerstors of the living. Moreover, the living wanting to get the best benediction, they would burn even more spiritual money.
(Keep in mind that this Edit is only my speculations. I hope it will help) 752