When Bob receives a 5 percent nominal wage increase in a period where inflation is also 5 percent, then we say that he experiences no money illusion when:
A) when he believes that his real wage did not change.
B) he believes that his real wage decreased.
C) he believes that his real wage increased.
D) All of the above are correct.

Question

Quizplus · Accepted Answer

When Bob receives a 5 percent nominal wage increase in a period where inflation is also 5 percent, his real wage remains the same. If he believes that his real wage did not change, then he is not experiencing money illusion. Therefore, option A is the correct choice. Option B is incorrect because if Bob believes that his real wage decreased, he is experiencing money illusion. Option C is also incorrect because his real wage did not increase, it remained the same. Option D is also incorrect as only choice A is correct.

When Bob Receives a 5 Percent Nominal Wage Increase in a Period