Joe's increase in wages has been identical to the increase in the price level. Joe thinks that he is better off and has increased his expenditures. Joe's behavior is consistent with
A) Say's Law.
B) the classical model.
C) a vertical aggregate supply curve.
D) money illusion.

Question

Quizplus · Accepted Answer

Joe's behavior is consistent with money illusion, which occurs when individuals mistake nominal changes for real changes. While Joe's wages have increased nominally, the increase in the price level means that his wages have not actually increased in real terms. However, Joe perceives that he has more money to spend and increases his expenditures accordingly, which exemplifies money illusion.

Joe's Increase in Wages Has Been Identical to the Increase