The absence of money illusion means that

Question

Quizplus · Accepted Answer

The absence of money illusion refers to the fact that individuals' perception of the value of money does not change with changes in the price level. Therefore, if the price level doubles, individuals will not necessarily demand twice as much money to maintain their purchasing power. As a result, the demand for money is not directly proportional to changes in the price level and option D is the correct choice. Option A is incorrect because real income and demand for money have an inverse relationship. Option B is incorrect because there is no direct relationship between interest rates and the demand for money. Option C is incorrect because the quantity theory of money suggests that the demand for money is directly proportional to the money supply.

The Absence of Money Illusion Means That