Answer to Question #4601 in Macroeconomics for Jessica Richardson

Question

Show how an announcement by the Fed that the money supply will be increased in the future, will lead to an increase in the price level today.

Answer 1

First step: Announcement by the Fed that the money supply will be increased in the future will cause expectation of decreasing price of money (due to supply increase)
Second Step: everyone will start buying and spending money until they lose their value
Third step: Incremental demand in the market will lead to increasing in the price level