ECON 1010 Lecture Notes - Lecture 2: Money Illusion, Deposit Account, Deflation

• School: University of Manitoba
• Department: Economics
• Course: ECON 1010
• Professor: Sarrah Vakili

Document Summary

It is a fact of life that people often confuse nominal and real values in their everyday lives because they are misled by the effects of inflation. For example, a worker might experience a 6 per cent rise in his money wages giving the impression that he or she is better off in real terms. However if inflation is also rising at 6 per cent, in real terms there has been no growth in income. Money illusion is most likely to occur when inflation is unanticipated, so that people"s expectations of inflation turn out to be some distance from the correct level. When inflation is fully anticipated there is much less risk of money illusion affecting both individual employees and businesses. Supporters of tough inflation control would support the arguments made in this quote in a speech delivered in 2002 from mervyn king.