If you feel you are better off because you receive a 5 percent raise even when the price level also increases by 5 percent, then you are a victim of the
A) real income effect.
B) money income effect.
C) money illusion.
D) purchasing power effect.

Question

Quizplus · Accepted Answer

This scenario demonstrates the concept of money illusion, where individuals only focus on nominal income increases without considering changes in the price level. In reality, receiving a 5 percent raise while also experiencing a 5 percent increase in the price level means that a person's purchasing power has not changed, and they have not actually become better off. Money illusion can lead individuals to make incorrect economic decisions and judgments.

If You Feel You Are Better Off Because You Receive