Which of the following statements accurately reflects the money illusion?
A)Consumers care only about relative prices, not money prices.
B)Pure inflation does not change the budget constraint.
C)A change in money prices changes the indifference curves.
D)Money has no intrinsic value and therefore is essentially worthless.

Question

Quizplus · Accepted Answer

Pure inflation, where all prices and incomes increase at the same rate, does not alter the real purchasing power of consumers, hence their budget constraint in real terms remains unchanged. This reflects the concept of money illusion, where individuals may react to nominal changes without considering the real effects.

Which of the Following Statements Accurately Reflects the Money Illusion