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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