If a consumer buys less gasoline because gas prices decreased by 10 percent, even though all other prices have also decreased by 10 percent, then
A) the consumer is paying too close attention to changes in relative prices.
B) wages and prices are too flexible.
C) the consumer has been fooled by money illusion.
D) inflation is not a problem in the economy.

Question

Quizplus · Accepted Answer

This scenario illustrates the concept of money illusion, which refers to the tendency of individuals to focus on nominal values (i.e. the actual dollar amount) rather than real values (i.e. the purchasing power). In this case, the consumer is not recognizing that a 10 percent decrease in gas prices is offset by a 10 percent decrease in all other prices, resulting in no real change in purchasing power. Therefore, the consumer is not making an informed decision based on real values, but rather is being misled by the nominal values.

If a Consumer Buys Less Gasoline Because Gas Prices Decreased