The Fed has increased money supply to by 10% to $2.2 trillion.  What is the new price level?

1 Answer | Add Yours

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

There is no way to know what the exact price level will be in this situation.  We do not even know what the price level is before the Fed takes action so there is no way we can know what the new price level will be.

It is likely that the new price level will be higher than the old price level.  The increase in the money supply should lead to an increase in aggregate demand.  An increase in aggregate demand will generally lead to an increase in the price level.  It is, however, possible that the economy is in such a slump that the aggregate supply curve is horizontal.  If this is the case, there will be no increase in the price level. 

Thus, we cannot know what the price level will be.  We cannot even be sure if the price level will change, though it is likely that the price level will increase to some degree.

We’ve answered 318,988 questions. We can answer yours, too.

Ask a question