How does money illusion cause nominal wage rigidity?
A)Wages fall only when money illusion is present.
B)Since workers focus on nominal wages, employers focus on matching the rate of wage increase with the rate of inflation.
C)Money illusion leads to workers asking for fixed wage increases (and decreases) adjusted to the rate of inflation (or deflation).
D)Since workers focus on nominal earnings and thus resent wage cuts, employers often choose to hold nominal wages constant rather than lower them.

Question

Quizplus · Accepted Answer

Money illusion causes workers to focus on nominal earnings rather than real earnings. This means that when faced with the possibility of a wage cut, workers will resist because they perceive it as a decrease in their nominal earnings, even if it is not a decrease in their real purchasing power. Therefore, employers may choose to hold nominal wages constant instead of cutting them, leading to nominal wage rigidity.

How Does Money Illusion Cause Nominal Wage Rigidity