Jacob buys less soda when the price of soda rises 10 percent, while the prices of all other goods also rise 10 percent. Jacob is
A) suffering from money illusion.
B) worrying too much about a coming recession.
C) behaving in accordance with classical economic theory.
D) paying too much attention to changes in relative prices.

Question

Quizplus · Accepted Answer

Money illusion occurs when people react to nominal price changes without considering real price changes, which is what Jacob is doing by buying less soda even though all prices have risen equally.

Jacob Buys Less Soda When the Price of Soda Rises