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Money illusion

Description

The tendency of people to think of currency in nominal, rather than real, terms.

Money illusion in business decision

Employees might feel satisfied with a 2% raise in a year with 3% inflation, even though their real purchasing power has decreased, because their nominal income increased.

Money illusion in personal life decision

Receiving a 2% salary increase makes you feel richer even though inflation is 3%, and your purchasing power has decreased.