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A significant argument for the augmentation has to do with concept of money illusion. Money illusion means that you care about nominal rather than real amounts. Imagine that your salary increases by 20% over one year. Does this mean that you can increase your consumption? The answer is that it relies on the inflation. If inflation is 20%, you can consume as much as you did before. You should actually decrease you consumption if inflation exceeds 20%. We say that you have suffer from money illusion if you believe that you are better off if your salary increases by 20% whereas prices also increase by 20%. A higher nominal salary may create the ‘illusion' that you are richer.
If employees suffer from money illusion they will only care about nominal wage increases, expected inflation won't matter and there is no reason for traditional Phillips curve not to hold. If, though, they don't suffer from money illusion, ?wshould depend on both U and Πe and augmented Phillips curve is more realistic.
ACCOUNTING SYSTEM-EXAMPLE IV Now consider the economy as in example III. In the next year same outputs were produced and the same incomes were paid out. However, the household
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explain the neo-classical theory of trade and show the difference between this and the classical approach, as wellas the similarities
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In order to encourage you to take interests in the current affairs in business, and have more concerns about the real world problems (which is what economics is about), you are req
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