If a person thinks they are better off after a 10% wage increase, and all prices have risen 10% then they are experiencing ?
Correct answer: D. inflation illusion
- A. inflation
- B. a supply shock
- C. crowding out
- D. inflation illusion
Explanation
A 10% wage increase matched by a 10% rise in prices leaves real purchasing power unchanged, but the person feels better off because of a nominal change. This mistaken perception is called inflation illusion, also known as money illusion.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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