Question

explain the notion of money illusion in specific detail

Answer 1

Money illusion refers to the situation in which some nominal income rises, can contribute to the mistaken impression that a person or group increases their real purchasing power while monetary deflation due to inflation may actually decrease their purchasing power. Money illusion is a mental problem as a result of people being manipulated and believing rather than actual in nominal monetary values, as it can convey the perception of higher purchasing power.Money perception tends to support this concept in relation to the Philips curve, as it will suggest that workers interpret their income in nominal values. If employers do so, in order to compensate for inflation, they do not demand an increase in wages, and thus the actual recruitment costs of companies are lower. Therefore, the higher the rate of inflation, the more employees a business can employ, thereby satisfying the relationship between Philips and the curve.

Money illusion is a psychological issue that economists are debating. Some disagree with the theory, arguing that people think about their money automatically in real terms, adjusting for inflation because they see price changes every time they enter a store. Meanwhile, other economists claim that money illusion is rife, citing factors such as a lack of financial education, and price stickiness seen in many goods and services as reasons why people might fall into the trap of ignoring rising living costs.

First, prices respond differently to changed demand conditions: a rise in aggregate demand has an impact on commodity prices sooner than on labor market prices. Thus, a drop in unemployment is, after all, the result of declining real wages and an accurate assessment of the situation by employees is the only reason for the return to an initial (natural) unemployment rate (i.e. the end of the money illusion when they finally recognize the actual price and wage dynamics). The other (arbitrary) assumption relates specifically to special information asymmetry: employers can clearly observe whatever employees do not know about, in connection with changes in (real and nominal) wages and prices. The Phillips Curve's latest classical version was intended to remove the confounding additional presumptions, but its structure still needs illusion of cash.