<blockquote>
<p>If printing trillions of dollars causes prices to go up, would taking those trillions back cause prices to drop?</p>
</blockquote>
<p>Yes prices would drop, if all other things were held constant, but they wouldn’t drop by exactly 50% because the relationship between price level and money supply is not proportional 1:1.</p>
<p>For example, following standard IS-LM model, the relationship between money supply and price level is given by;</p>
<p><span class="math-container">$$P= \frac{M}{L(Y,i)}$$</span></p>
<p>Where <span class="math-container">$P$</span> is price level, <span class="math-container">$M$</span> money supply and <span class="math-container">$L$</span> money demand that depends on output <span class="math-container">$Y$</span> and interest rate <span class="math-container">$i$</span>.</p>
<p>Depending on parameters of <span class="math-container">$L$</span> function the relationship won’t necessary be proportional. For example, suppose <span class="math-container">$L=aY -bi$</span> then;</p>
<p><span class="math-container">$$dP/dM = \frac{1}{aY-bi}$$</span></p>
<p>So decrease in money supply would result in <span class="math-container">$dM \cdot \frac{1}{aY-bi}$</span> decrease in price level.</p>
<p>For example, if <span class="math-container">$a=0.01$</span>, <span class="math-container">$Y=300$</span>, <span class="math-container">$b=10$</span> and <span class="math-container">$i=0.1$</span> are then 50% decline in money supply would result in 25% drop in price level. Depending on parameter values the drop in prices could be more or less than 1:1 proportional.</p>
<p>PS: Note most money nowadays is not actually printed but created electronically.</p>

CC BY-SA 4.0
2024-07-20T13:25:21.860Z
Hi. How can sellers/producers know that prices must increase/decrease to correspond money supply as 1:1?@1muflon1
Mike_bb
CC BY-SA 4.0
2024-07-20T13:39:08.273Z
As I understood you wrote that my assumption is wrong https://economics.stackexchange.com/a/58235/43987 but here you wrote that "the relationship between price level and money supply is proportional 1:1" @1muflon1
Mike_bb
CC BY-SA 4.0
2024-07-20T16:47:26.793Z
@Mike_bb it’s a typo I meant to say is not proportional as also mentioned in later part of my answer
1muflon1
CC BY-SA 4.0
2024-07-20T18:16:33.317Z
Why can't we use $MV=PQ$ in this example? @1muflon1
Mike_bb
CC BY-SA 4.0
2024-07-20T21:24:08.867Z
@Mike_bb u can use it, but according to modern research MV=PQ is not the best description of money market. Most economists believe that PL(y,i)=M is the more correct description of money market. Generally empirical literature with cointegration tests that tries to test whether MV=PQ which boils down to estimating cointegrated relationship like $ \ln P = \beta_1 \ln M + \beta_2 \ln V -\beta_3 \ln Q $ find that $\beta_1 \neq \beta_2 \neq \beta_3 \neq 1$ which means that empirical evidence generally rejects $MV=PQ$. There were some studies that found $\beta_1 =\beta_2 = \beta_3 =1$ but they are
1muflon1
CC BY-SA 4.0
2024-07-20T21:25:16.357Z
not in majority, so the most accepted interpretation is that at best MV=PQ is a special case of PL(y,i) =M that holds occasionally when the coefficients happen to be such that you get that result.
1muflon1
CC BY-SA 4.0
2024-07-20T08:05:00.247Z
2024-07-20T16:47:51.403Z
2024-07-20T16:47:51.403Z
1muflon1
<p>If printing trillions of dollars causes prices to go up, would taking those trillions back cause prices to drop?</p>

CC BY-SA 4.0
2024-07-19T16:44:19.050Z
In theory yes. In practice, the rent is increased. And we have just seen how this has lowered inflation.
Jesper Hybel
<inflation>
Would Prices start dropping , say 50% if the government took back 50% of the trillions of dollars printed the last several years in the US economy?
Terrance Magnumb
# Would Prices start dropping , say 50% if the government took back 50% of the trillions of dollars printed the last several years in the US economy?

(Asked by: username_0 on 2024-07-19)

If printing trillions of dollars causes prices to go up, would taking those trillions back cause prices to drop?

**Tags:** inflation
> **Comments:**
> **username_1**: In theory yes. In practice, the rent is increased. And we have just seen how this has lowered inflation.  

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## 1 answers

### Answer by username_2 on 2024-07-20. Score: 2

> If printing trillions of dollars causes prices to go up, would taking those trillions back cause prices to drop?

Yes prices would drop, if all other things were held constant, but they wouldn’t drop by exactly 50% because the relationship between price level and money supply is not proportional 1:1.

For example, following standard IS-LM model, the relationship between money supply and price level is given by;

$$P= \frac{M}{L(Y,i)}$$

Where $P$ is price level, $M$ money supply and $L$ money demand that depends on output $Y$ and interest rate $i$.

Depending on parameters of $L$ function the relationship won’t necessary be proportional. For example, suppose $L=aY -bi$ then;

$$dP/dM = \frac{1}{aY-bi}$$

So decrease in money supply would result in $dM \cdot \frac{1}{aY-bi}$ decrease in price level.

For example, if $a=0.01$, $Y=300$, $b=10$ and $i=0.1$ are then 50% decline in money supply would result in 25% drop in price level. Depending on parameter values the drop in prices could be more or less than 1:1 proportional.

PS: Note most money nowadays is not actually printed but created electronically.

> **Comments:**
> **username_3**: Hi. How can sellers/producers know that prices must increase/decrease to correspond money supply as 1:1?@1muflon1  
> **username_3**: As I understood you wrote that my assumption is wrong https://economics.stackexchange.com/a/58235/43987 but here you wrote that "the relationship between price level and money supply is proportional 1:1" @1muflon1  
> **username_2**: @Mike_bb it’s a typo I meant to say is not proportional as also mentioned in later part of my answer  
> **username_3**: Why can't we use $MV=PQ$ in this example? @1muflon1  
> **username_2**: @Mike_bb u can use it, but according to modern research MV=PQ is not the best description of money market. Most economists believe that PL(y,i)=M is the more correct description of money market. Generally empirical literature with cointegration tests that tries to test whether MV=PQ which boils down to estimating cointegrated relationship like $ \ln P = \beta_1 \ln M + \beta_2 \ln V -\beta_3 \ln Q $ find that $\beta_1 \neq \beta_2 \neq \beta_3 \neq 1$ which means that empirical evidence generally rejects $MV=PQ$. There were some studies that found $\beta_1 =\beta_2 = \beta_3 =1$ but they are  
> **username_2**: not in majority, so the most accepted interpretation is that at best MV=PQ is a special case of PL(y,i) =M that holds occasionally when the coefficients happen to be such that you get that result.  

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