Real Balance Effect

Riding a unicycle on a tightrope. Walking home from a raucous New Year's Eve party. Examples of one kind of, um…real balance effect.

Another kind relates to economic decisions.

The real balance effect has to do with the purchasing power of money. It posits that a change in price levels alters how much stuff you can buy...that is, assuming your income remains the same. You make $4,000 a month. Take out taxes and rent and utilities and insurance and all the other basic stuff that eats away at your disposable income. Now you have $1,500 in cash to spend each month.

But you still have to eat. Because of a rare gastrointestinal disorder, you have to eat special snails with every meal. There's a certain enzyme that your body can't produce that can only come from this particular natural snail meat. Eat them...or you'll die. So, snail smoothies for breakfast. Snail sandwiches for lunch. Snail a la king for dinner. And for a late-night snack: deep fried snail poppers.

The snails you need are usually $8 a pound. In a typical month, you spend about $400 on them. Which leaves you $1,100 out of your budget for other stuff. Money to go to the movies or buy video games or purchase gold grills for your teeth. Whatever else you need.

But this month, you get bad news. There's been an outbreak of a rare snail ebola that has ravaged the population of the special snails you need. The number of snails available has plummeted. In response, prices double. What used to cost $8 a pound now costs $16 a pound. Instead of $400, this month your snail fix will cost $800.

It cuts into your other spending. You used to have $1,100 for everything else. Now, you've just got $700. You'll have to cut back on your non-snail expenditures.

Real balance effect at work. Basically, if prices go up and income remains the same, consumption expenditures have to decline. You just can't buy as much with the money you have.

You'll have to economize this month. Only streaming movies. Replay old video games. Brass grills for the time being. At least until they ramp up those experimental snail farms...or find a cure for snail ebola.