Question

If the price level increases by 0.2 percent for every $100 billion increase in the money supply, by how much might prices rise if the Fed increases total reserves by $80 billion and the reserve requirement is 0.05?

Answer 1

Increase in price level = 3.2%

Step-by-step explanation:

Given:

Price level increases = 0.2

Reserves = $80 billion

Reserve requirement =0.05?

Computation:

Increase in money = Increase in reserves / Reserve ratio

Increase in money = $80 billion / 0.05

Increase in money = 1,600

And

Increase in price level = (Increase in money / 100) x 0.2%

Increase in price level = (1,600 / 100) x 0.2%

Increase in price level = 3.2%