General price level refers to the collective figure attributed as the price of consumable goods in an economy at any moment in time. When determining the price level, several figures are deducted from different moments in order to get an accurate figure. This is because the general price level is not the same as a continuous daily monitoring of the level of the price of goods, but it is rather the price of goods at the moment under consideration.
The attribution of a figure as the general price level is done through the examination of an aggregate of consumer goods in order to arrive at a specific price. This price can be further examined in the future by comparing the previous result to any other result in order to determine the state and behavior of the economy. Where the price is relatively stable, then the economy can be said to be stable. When there is an increase in the figures from separate examinations of the general price level, this denotes an increased level of activity in the market.
Studying the general price level allows economists to make assumptions about factors like Gross Domestic Product (GDP), inflation and deflations. In order to determine if there is an increase in the price of goods and services, the previous result will be compared to the new one. If the old result is less than the new one, this is an indicator that there is a price increase or inflation. The exact percentage of the inflation can be determined by subtracting the old result from the new one; the difference will give an indication of the percentage of increase.
When the percentages between various periods under study increase at a fast rate, economists start to worry, because this means that the GDP level is rising unsustainably as well. This serves as a signal for the government to intervene by introducing measure that will bring down the prices of goods. One of those measures is the increase of interest rates. Increasing the interest rate normally serves as sort of economic brake on consumption. The purpose in this is to make it more expensive for consumers to obtain money from banks and other credit facilities.
As a consequence of the increase, people may be encouraged to save more than they spend. When this happens, the demand for goods and services decreases and the price of such items also decreases in response. The effect of this decrease in the price of goods and services is a reduction in the general price level.