money illusion

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Money Illusion

In economics, the tendency of persons not to consider inflation or deflation when making decisions. That is, the money illusion states that people think in terms of the amount of money they have, rather than in terms of its value (which tends to decline over time). The money illusion was described by John Maynard Keynes and Irving Fisher.

money illusion

the illusion based on the failure of people to appreciate that a general increase in prices (INFLATION) reduces the real PURCHASING POWER of their income (REAL WAGES). In practice, however, this is unlikely to occur once people have become ‘accustomed’ to living with inflation and trade unions negotiate for increases in MONEY WAGES that allow for inflationary EXPECTATIONS. See also ADAPTIVE EXPECTATIONS HYPOTHESIS, INFLATIONARY SPIRAL.