Final answer:
The statement is True. When the price level is above the equilibrium level, there is excess supply of money in the economy, leading to a decrease in the price level.
Step-by-step explanation:
Indeed, the statement is accurate. In circumstances where the price level surpasses the equilibrium level, it signifies an excess supply of money within the economy. In this scenario, individuals express a desire to hold a greater amount of money than the Federal Reserve (Fed) has introduced into circulation. This incongruity between the demand for and supply of money necessitates an adjustment to reinstate equilibrium.
To rectify the imbalance, a natural economic mechanism comes into play—the price level must decrease. This reduction in the general price level is essential to align the supply and demand for money. As people seek to hold more money than the Fed has generated, a decrease in the price level effectively increases the purchasing power of money, making it more attractive to individuals. The decline in prices serves as an incentive for people to hold the available money, thus mitigating the initial excess supply.
This process is integral to the functioning of monetary policy, as it allows the economy to self-adjust and find a state of equilibrium. The interplay between the supply and demand for money, reflected in changes in the price level, is a fundamental aspect of macroeconomic dynamics that helps maintain stability in the financial system.