Money illusion, Macroeconomics

Assignment Help:

A significant argument for the augmentation has to do with concept of money illusion. Money illusion means that you care about nominal rather than real amounts. Imagine that your salary increases by 20% over one year. Does this mean that you can increase your consumption? The answer is that it relies on the inflation. If inflation is 20%, you can consume as much as you did before. You should actually decrease you consumption if inflation exceeds 20%. We say that you have suffer from money illusion if you believe that you are better off if your salary increases by 20% whereas prices also increase by 20%. A higher nominal salary may create the ‘illusion' that you are richer.

If employees suffer from money illusion they will only care about nominal wage increases, expected inflation won't matter and there is no reason for traditional Phillips curve not to hold. If, though, they don't suffer from money illusion, ?wshould depend on both U and Πe and augmented Phillips curve is more realistic.


Related Discussions:- Money illusion

Impulse response functions, After an oil price shock was impacted upon the ...

After an oil price shock was impacted upon the other five variables in the model, many interesting results were found. I have already demonstrated that oil Granger causes i

Discretionary Fiscal Policy Effectiveness, Discretionary fiscal policy will...

Discretionary fiscal policy will stabilize the economy most when: A.) deficits are incurred during recessions and surpluses during inflations B.) the budget is balanced each year C

World leaders to be part of a team, You have been invited by world leaders ...

You have been invited by world leaders to be part of a team of international economists selected to make recommendations on how the international community might work together more

Fixed exchange rate supply and demand questions, 1.    Which function of...

1.    Which function of money is disrupted as a result of high inflation? Why? 2.    The central bank of Fiji has issued $1,000,000 in Fijian dollars. What is the size of m

Composition and direction of trade, Composition and Direction of Trade: ...

Composition and Direction of Trade: The impact of trade reforms can be observed from the changing structure of India's  foreign  trade in  terms of diversity  of  production

Perfectly competitive firm, Explain why P=MC in the short-run equilibrium o...

Explain why P=MC in the short-run equilibrium of the perfectly competitive firm, whereas in the long-run equilibrium P=MC=AC.

Determine the optimum prices and outputs-probability, Given the following: ...

Given the following: Airbus Boeing Demand P = 182.868 - 0.0003Q P = 198.6592 - 0.00013Q TVC Curve TVC = 104.8822Q - 0.001Q^2 + 0.09Q^3 TVC = 25.8678Q - 0.00023Q^2 + 0.4Q^3 In

Classical model of the labor market, Q. Classical model of the labor market...

Q. Classical model of the labor market? We begin by explaining the classical model of the labor market.  The demand for labor L D is assumed to be inversely re

Is consumption depend on GDP in the cross model, Q. Is Consumption depend o...

Q. Is Consumption depend on GDP in the cross model? Aggregate demand The consumption function Consumption C(Y) depends positively on GDP in the cross

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd