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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?

Respuesta :

Answer:

Prise rise = 3.2%

Explanation:

Given the increase in price level = 0.2%

The increase in total reserve by the Fed = $80

Reserve requirement = 0.05

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

Increase in money supply = 80 / 0.05 = 1,600

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

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

Increase in price level = 3.2%

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