Explain what role money illusion plays in determining the Fed's ability to affect output in the short run
What will be an ideal response?
Money illusion refers to a situation where individuals make mistakes about the distinction between nominal and real magnitudes. For example, individuals might be reluctant to accept a reduction in the nominal wage (that would cause a reduction in the real wage) while at the same time would "accept" a reduction in the real wage when inflation exists and the nominal wage does not change. Money illusion, therefore, might allow a central bank to inflate an economy and, therefore, cause output to rise temporarily.
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The above figure shows a competitive firm's demand for labor assuming that the firm's output sells for $1 per unit. If the wage is $5 per hour, a ten cent specific tax on the good sold by the firm will cause the firm to
A) demand less labor. B) demand more labor. C) offer its workers only $4.90 per hour. D) hire 0 units of labor per hour.
In general, developed countries depend more heavily on indirect taxes on goods and services than do developing countries
a. True b. False Indicate whether the statement is true or false