Which of the following helps to explain why the "inflation fallacy" is a fallacy?
A)Increases in the price level can be created by increases in money demand.
B)Nominal incomes tend to rise at the same time that the price level is rising, leaving real income unchanged.
C)As the price level rises, the value of a dollar falls.
D)Inflation only changes real variables.

Question

Quizplus · Accepted Answer

The "inflation fallacy" often refers to the mistaken belief that inflation only erodes purchasing power without considering that nominal incomes typically increase along with prices. This means that if both prices and incomes rise proportionally, the real income (purchasing power) may remain unchanged, thus explaining why the belief is a fallacy.

Which of the Following Helps to Explain Why the "Inflation