Price level
Definition
The price level represents the average level of prices for goods and services in an economy at a given point in time.
Analogy
Imagine going grocery shopping with a fixed budget. The price level is like an indicator that shows how expensive or affordable groceries are overall. If prices are high, your budget won't buy as much; if prices are low, you can get more for your money.
Related terms
Inflation: A sustained increase in the general price level over time, resulting in a decrease in purchasing power.
Deflation: A sustained decrease in the general price level over time, leading to an increase in purchasing power.
Consumer Price Index (CPI): A measure that tracks changes in prices of a basket of goods commonly purchased by households, providing insight into inflation trends.
"Price level" appears in:
Study guides (4)
Additional resources (1)
Practice Questions (9)
What is the relationship between the price level and Real GDP?
What is the relationship between the price level and real GDP output in the short-run aggregate supply (SRAS)?
How does the quantity of real GDP output supplied by firms change as the price level falls in the short-run aggregate supply (SRAS)?
What is the impact of an increase in government spending on the Short-Run Aggregate Supply (SRAS) curve and the price level in the short run?
If the price level increases above equilibrium, what does this tell you about the GDP?
How does a permanent shock affect the price level in the economy?
In the short run, how does contractionary fiscal policy affect aggregate demand and the price level?
What is the result of a decrease in the money supply on the price level in the long run, assuming the velocity of money and real GDP remain constant?
If the velocity of money increases while the money supply remains constant, what is likely to happen to the nominal GDP, assuming that the price level remains constant?
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