A friend tells you that his income has risen every year by 5 percent.At the same time,prices,on average,have risen by 5 percent.Your friend claims he is better off.Your friend

Question

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Your friend is experiencing money illusion because although his nominal income (the amount of money he earns) has increased by 5 percent, prices have also increased by 5 percent, meaning his real income (the purchasing power of his income) has not increased.

A Friend Tells You That His Income Has Risen Every