Economics Week 29 Price Level

Prompt: “If there is no ‘price level,’ how could anyone prove that monetary inflation raises prices?”

Price level is the price of goods and services, and it fluctuates depending on how much currency is in the system. The question makes it out to seem that price level is what causes inflation, but it’s actually the other way around. Inflation is caused by more and more money being printed into the economy. This seems good at first glance, since more people will have access to said money. But what this actually does is make money less rare, and therefore less valued.

For an example lets think of a pure barter economy that trades sea shells as currency. If the amount of sea shells in the economy is consistent then the price level will also be consistent. The sea shells are rare and hard to get, so generally they will have a maintained value. Now lets imagine that all of a sudden the sea pumps out thousands of sea shells out of thin air. Now that once rare and valued asset is flooding the market. Everyone has tons of sea shells, and they aren’t valued as much because everyone has so many.

This is inflation, and the same happens to our paper financial system if money continues to be printed. In a sea shell economy a shoe maker originally sold his shoes for five sea shells, but after the sea pumps out thousands suddenly he needs to sell his shoes for ten. That is how inflation affects prices, and ultimately sets the price level of everything we buy.