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.
References in periodicals archive ?
"Does Money Illusion Matter?" American Economic Review, 19(5): 1239-62.
The money illusion even bleeds into impressions of the "strength" of the economy, as if a high level of GDP growth or a bull market are indicators of the health of something called the economy.
* Kelly Shue, Yale University and NBER, and Richard Townsend, University of California, San Diego, "Money Illusion in Asset Pricing"
Many people suffer from money illusion, meaning that they think in terms of nominal rather than real monetary values.
Money illusion is most likely to occur when inflation is unanticipated, so that people's expectations of inflation turn out to be some distance from the correct level.
"The concept of money illusion is critical here," he responds.
This enabled Friedman to avoid, wittingly or unwittingly, another strand of inflationary gap discussion with 1942 roots--namely, consumer money illusion, Smithies (1942).
This would lead to a transfer of wealth to debtors from creditors and would result in falling living standards via money illusion, rising prices, currency depreciation and loss of confidence.
Currency substitution (eurization) and money illusion as the limited factors of devaluation implementation
Under the broader rubric of animal spirits as they define it, Akerlof and Shiller cite five factors that cause behavior to deviate from rationality, devoting one chapter to each of them: confidence, fairness, corruption and antisocial behavior, money illusion, and stories.
And Friedman was surely fight to deride the idea of a long-term unemployment-inflation tradeoff depending on money illusion.
Such a behaviour has been described for years by economists as the 'money illusion'.