When Bob incorrectly believed that his real wage went up when his nominal wages increased because he failed to factor in the effects of inflation, then economists say that he is a victim of:
A) the discouraged worker effect.
B) inflation injustice.
C) unemployment.
D) money illusion.

Question

Quizplus · Accepted Answer

Bob is a victim of money illusion, which refers to the tendency of individuals to think in nominal rather than real terms. In other words, Bob only saw that his nominal wage increased, but failed to consider the effect of inflation on his purchasing power or real wage.

When Bob Incorrectly Believed That His Real Wage Went Up