When Bob receives a 5 percent nominal wage increase in a period where inflation is also 5 percent, then we say that he experiences 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

Money illusion occurs when Bob believes his real wage increased, despite the fact that the nominal wage increase is exactly offset by inflation, leaving his real wage unchanged.

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