That is, if the economy is operating at a level of output below full employment, the price level will tend to fall, and at least for a given value of the nominal money supply, this will tend to stimulate aggregate demand.
Over time, this process will raise aggregate 8  Squaring the deviations from target values also penalizes larger deviations more than proportionately compared to smaller ones. 9  Levin, Volker and Williams (1999) analyze the output-inflation volatility frontier in four different macroeconomic models. 10  For some supporting evidence, see Cecchetti and Ehrmann (2001).