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 $150 billion and the reserve requirement is 0.1?

Answer 1

3%

Step-by-step explanation:

Increase in money supply ($ billion) = Increase in reserves / Reserve ratio

Increase in money supply ($ billion) = 150 / 0.1

Increase in money supply ($ billion) = 1,500

Increase in price level = (Increase in money supply / 100) * 0.2

Increase in price level = (1,500/100) * 0.2

Increase in price level = 3%