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money illusion


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Mistaking nominal for real changes. People may interpret rises in their own wages, or the prices of goods and services they sell, or assets that they own, as real gains rather than as part of a general process of price and wage inflation. Money illusion might arise in a society with a history of wage and price stability. The longer inflation persists, the more likely people are to assume that when their wages or prices rise their real position is not improved, as everybody else's prices and wages are probably rising too.

Subjects: Economics.


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