When people make decisions on the basis of the face value of currency rather than the real value,their decisions reflect
A)The price effect of inflation.
B)The income effect of inflation.
C)The wealth effect of inflation.
D)Money illusion.

Question

Quizplus · Accepted Answer

Money illusion is the tendency of people to confuse nominal changes with real changes, resulting in decisions based on the face value of currency rather than the real value. For example, if someone receives a 5% raise but inflation is 10%, they may erroneously believe that they are better off financially, when in reality the purchasing power of their income has decreased. Thus, the correct answer is D, money illusion.

When People Make Decisions on the Basis of the Face