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The Price Level

By Matthew Yglesias  

"The Price Level"

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One term that comes up when talking about monetary policy and economic stabilization that people may not be familiar with is the “price level.” What is this? Well, think of it this way—when you account for the difference in a nominal quantity and a “real” quantity what you’re accounting for is the change in the price level. So in 2005, US GDP was $12.64 trillion and by 2008 it was $14.37 trillion. That’s an increase of $1.73 trillion. But if you measure in chained 2005 dollars, the increase was only from $12.64 to $13.23—an increase of just $0.59 trillion. The rest of the increase wasn’t “real” it was just an increase in the price level.

The rate at which the price level increases is the inflation rate. If you have unusually little inflation for a few years, then unless you have some make-up years of unusually high inflation, the price level will stay permanently below trend. Similarly, if you have unusually high inflation for a few years then unless you have some make-up years of unusually low inflation, the price level will stay permanently below trend.

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