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.
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Correcting money illusion can help people to understand the real rate of return earned on investments and to appreciate that a fixed nominal stream of payments has falling purchasing power over time.
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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.
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Alternatively, the economy may achieve sustainable growth only at very low levels of inflation (or, per Selgin, deflation), but the money illusion still causes unemployment at these low levels of inflation.
A comparative institutional analysis of free banking and central bank NGDP targeting
The concept of money illusion is critical here," he responds.
Flexible currency basket could boost GCC development
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.
Recalling the plight of negative equity; Paul Wharton, UK Chief Investment Strategist, Deutsche Bank Private Wealth Management, reports
Currency substitution (eurization) and money illusion as the limited factors of devaluation implementation
Devaluation as the instrument for recession overcoming in Bosnia and Herzegovina
However, the money illusion hypothesis states that stock market investors suffer from money illusion and incorrectly discount real cash flows with nominal discount rates, thereby causing the market's subjective expectation of the future equity premium to deviate systematically from the rational expectations (e.
Inflation and real stock returns revisited
There is no money illusion if changes in the unit of account don't change anything real.
Dynamic measures of inflation
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.
Animal spirits
And Friedman was surely fight to deride the idea of a long-term unemployment-inflation tradeoff depending on money illusion.
Keynes was no socialist
This result means that reward activation generally increases with income, but was significantly higher in situations where nominal incomes and prices were both 50 per cent higher, which supports the hypothesis that activity in the ventromedial prefrontal cortex is subject to money illusion," The Telegraph quoted Prof Falk, as saying
Spending money gives brain the same buzz as doing drugs

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