Money illusion is:
A) the average number of times a dollar is spent on final goods and services in a year.
B) mistaking changes in nominal prices for changes in real prices.
C) a decrease in the average level of prices.
D) an increase in the average level of prices.

Question

Quizplus · Accepted Answer

Money illusion refers to the tendency of people to mistake changes in nominal prices for changes in real prices. It occurs when individuals do not fully account for inflation or deflation when evaluating changes in prices. This can lead people to make incorrect economic decisions, such as overestimating the purchasing power of their money during a period of high inflation. Options A, C, and D do not accurately describe money illusion.

Money Illusion Is