Question

what are some problems related to money illusion ? ( macroeconomics)

what can be a good example to explain money illusion?

Answer 1

Money illusion is the tendency of people to think of money in nominal terms rather than in real terms. In other words, people tend to fail to account for inflation when they think of the purchasing power of their money leading them to believe that the purchasing power is the same as in an earlier period.

Example- Workers prefer a 5% rise in wages along with a 10% inflation rather than a 5% decrease in wages with no inflation even though their purchasing power would be the same in either case.