Because of the money illusion, inflation usually confuses

Question

Quizplus · Accepted Answer

Money illusion is the tendency of people to think in nominal terms rather than real terms. Inflation usually confuses consumers as they focus on the increase in the prices of goods and services rather than the decrease in the purchasing power of their money. Workers are confused as they focus on nominal wages rather than real wages, which is the actual value of their wages after adjusting for inflation. Firms are confused as they focus on nominal profits rather than real profits, which is the actual profit after adjusting for inflation. Therefore, inflation usually confuses all three groups of people.

Because of the Money Illusion, Inflation Usually Confuses