<p>It's not in the model itself, but people/voters hate price level increases. A large part of that may be money illusion as the nominal price level is irrelevant for real allocations.</p>

CC BY-SA 4.0
2024-10-23T16:05:12.597Z
2024-10-23T16:05:12.597Z
jpfeifer
<p>In Ben Bernanke's Macroeconomics, in discussing approaches to dealing with recessions, he mentions three broad approaches:</p>
<ul>
<li>Government does nothing: The price level eventually decreases, until aggregate demand equals the LRAS, increasing the real money supply M/P.</li>
<li>The central bank increases the nominal money supply, bringing the real money supply to the level that aggregate demand equals the LRAS.</li>
<li>Fiscal policy</li>
</ul>
<p>In both of the first two cases the real money supply ends up being the same — the difference being in whether M or P in the M/P is changing, with the first adjustment being perhaps quicker. He says:</p>
<blockquote>
<p>Thus according to the
Keynesian analysis, using expansionary monetary or fiscal policy has the advantage of bringing the economy back to full employment more quickly but the
disadvantage of leading to a higher price level than if no policy action is
undertaken.</p>
</blockquote>
<p>What I don't understand is why does a higher price level matter when the real money supply ends up being the same? Why is this a &quot;disadvantage&quot;?</p>

CC BY-SA 4.0
2024-10-14T16:57:10.463Z
It's not in the model itself, but people/voters hate price level increases. A large part of that may be money illusion as the nominal price level is irrelevant for real allocations.
jpfeifer
CC BY-SA 4.0
2024-10-14T17:09:25.103Z
@jpfeifer Ah, okay. Thanks.
User2956
CC BY-SA 4.0
2024-10-22T15:44:56.347Z
@jpfeifer: Post as an answer?
Herr K.
<macroeconomics>
Why does the price level matter if the real money supply is equivalent
User2956
# Why does the price level matter if the real money supply is equivalent

(Asked by: username_0 on 2024-10-14)

In Ben Bernanke's Macroeconomics, in discussing approaches to dealing with recessions, he mentions three broad approaches:

* Government does nothing: The price level eventually decreases, until aggregate demand equals the LRAS, increasing the real money supply M/P.
* The central bank increases the nominal money supply, bringing the real money supply to the level that aggregate demand equals the LRAS.
* Fiscal policy

In both of the first two cases the real money supply ends up being the same — the difference being in whether M or P in the M/P is changing, with the first adjustment being perhaps quicker. He says:

> Thus according to the
> Keynesian analysis, using expansionary monetary or fiscal policy has the advantage of bringing the economy back to full employment more quickly but the
> disadvantage of leading to a higher price level than if no policy action is
> undertaken.

What I don't understand is why does a higher price level matter when the real money supply ends up being the same? Why is this a "disadvantage"?

**Tags:** macroeconomics

> **Comments:**
> **username_1**: It's not in the model itself, but people/voters hate price level increases. A large part of that may be money illusion as the nominal price level is irrelevant for real allocations.  
> **username_0**: @username_1 Ah, okay. Thanks.  
> **username_2**: @username_1: Post as an answer?  

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## 1 answers

### Answer by username_1 on 2024-10-23. Score: 1 | Accepted answer

It's not in the model itself, but people/voters hate price level increases. A large part of that may be money illusion as the nominal price level is irrelevant for real allocations.


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