If the price level falls but workers are reluctant to accept a pay cut,this is an example of
A) menu costs.
B) money illusion.
C) a legally binding contract.
D) a supply shock.
E) an implicit contract.

Question

Quizplus · Accepted Answer

Money illusion refers to the phenomenon where people's decisions are influenced by nominal values (such as wages or prices) rather than real (inflation-adjusted) values. In this scenario, if workers are reluctant to accept a pay cut even though the price level (and thus the cost of living) has fallen, it suggests that they are suffering from money illusion.

If the Price Level Falls but Workers Are Reluctant to Accept