A consumer who buys more coffee when the price of coffee falls 5 percent, while all other prices fell 5 percent too, 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 changes in nominal prices rather than real prices. In this scenario, since all prices fell by the same percentage, the real price of coffee relative to other goods hasn't changed, yet the consumer buys more coffee, indicating they are influenced by the nominal price change.

A Consumer Who Buys More Coffee When the Price of Coffee