Economic Definition of money illusion. Defined.
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Term money illusion Definition: The erroneous perception that a change in nominal wages or income results in an equal change in real wages or income. Money illusion occurs due to a difference between the actual prices and perceived prices. In particular, people usually have better information about nominal wages or income received than the prices paid for goods and services. For example, a worker might receive a 10 percent increase in nominal wages view this as a 10 percent increase in real wages (and living standard) by failing to recognize that the price level in the economy has also increased by 10 percent. Money illusion is one reason underlying the positive slope of the short-run aggregate supply curve.