Which of the following is an example of money illusion assuming that inflation is 5 percent?
A) You receive a 5 percent raise on your part-time job and start spending extra money on entertainment every weekend.
B) You receive a 5 percent raise on your part-time job, but do not increase or decrease your spending.
C) You do not receive a raise on your part-time job, but cut out some expenses as you notice some prices rising.
D) None of the answers is correct.

Question

Quizplus · Accepted Answer

Choosing to spend extra money on entertainment every weekend after receiving a 5 percent raise assumes that the value of money has not changed, despite inflation. This is an example of money illusion.

Which of the Following Is an Example of Money Illusion