Money illusion

People mistake the face value of money(the amount of money) with the real value(what it can buy).


Money illusion influences economic behaviour in three main ways:

  • Money illusion has been proposed as one reason why nominal prices are slow to change even where inflation has caused real prices to fall or costs to rise.
  • Contracts and laws are not indexed to inflation as frequently as one would rationally expect.
  • Social discourse, in formal media and more generally, reflects some confusion about real and nominal value.