Discovering money illusion: The behavior of nominal prices subject to monetary shocks

• Main Authors: Evangelista, Charizze L., Manongdo, Gwendelyn M., Ong, Kathleen Margaret N., Sueno, Bahandi B.
• Format: text
• Language: English
• Published: Animo Repository 2009
• Subjects: Money illusion
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/14726
• Institution: De La Salle University

This paper analyzes how money illusion affects the adjustment of prices to the new equilibrium after the imposition of different types of monetary shocks. This study is of importance because of having a prior knowledge of the behavior of prices after every shock can be very beneficial to the different economic agents within an economy. To address the main concern, the researchers utilized the altered experimental set up of Fehr and Tyran (2001). The steps and procedures of the experiment were not changed except for the number of rounds, the nature of the shocks imposed and the number of treatments implanted. Based on the results, only the participants under the monetary shock that is unanticipated in magnitude have reached the pre-shock and post-shock average equilibrium price for both nominal and real treatment. Moreover, comparing the time of adjustment it takes the participants under anticipated shock is much slower. This implies that the effect of money illusion is more pronounced when the magnitude of the monetary shock is unknown. From these observations, it can be inferred that if the time and extent of a monetary shock fir t can significantly lessen the effects of money illusion. In addition, since inflation is a component of nominal prices, it is advisable that the authorities should extensively prevent any increased in the inflation advisable that the authorities should extensively present any increases in the inflation rate for this reduces price distortions thus enhancing the decision-making process.