If a consumer buys less gasoline because gas prices increased by 10 percent, even though all other prices have also increased by 10 percent, then
A) the consumer is paying too close attention to changes in relative prices.
B) wages and prices are too flexible.
C) the consumer has been fooled by money illusion.
D) inflation is not a problem in the economy.

Question

Quizplus · Accepted Answer

This scenario demonstrates money illusion, where the consumer is fooled by nominal prices rather than considering the real purchasing power of their income. All prices, including wages, have increased by 10 percent, meaning the consumer's real income has not changed. However, because the nominal price of gasoline has increased by 10 percent, the consumer perceives a decrease in their purchasing power and buys less gasoline.

If a Consumer Buys Less Gasoline Because Gas Prices Increased