If the price level falls but workers are reluctant to accept a pay cut,this is an example of:
A) menu cost.
B) money illusion.
C) a legally binding contract.
D) a supply shock.
E) an implicit contract.

Question

Quizplus · Accepted Answer

When workers are reluctant to accept a pay cut despite a fall in the overall price level, it suggests that they are experiencing "money illusion," which is the tendency to focus on nominal wages rather than real wages (which reflect the purchasing power of their income). In other words, they may not fully realize that their real income has not changed even though their nominal income has. This can stem from a variety of factors, such as habituation to a certain level of income, contractual agreements that specify nominal wages, or a lack of understanding about inflation and purchasing power. Therefore, B is the correct answer, while A, C, D, and E are not as directly relevant to this scenario.

If the Price Level Falls but Workers Are Reluctant to Accept