Money illusion, also known as "money illusion", is an interesting concept in economics and finance. It refers to the tendency of people to misperceive the actual purchasing power of their money by being influenced by nominal amounts of money rather than real values.

In simpler terms, money illusion occurs when people think that a pay rise or a price increase of 5% is significant without taking inflation into account. This can lead them to believe they are better off when in fact their purchasing power has decreased.

An example of this would be if someone receives a pay rise of 5%, but inflation in the same period is 7%. Although the salary has increased nominally, this person can actually buy less than before because the prices of goods and services have risen faster than their income.

Money illusion can have a significant impact on economic decisions. For example, people may tend to spend more money if they believe they are earning more without considering the purchasing power of their money. This can lead to excessive consumption and cause financial problems in the long term.

Money illusion is also important in economic policy. Central banks and governments must carefully monitor and control inflation, as high inflation can affect the purchasing power of the population, even if wages rise.

To avoid the money illusion, it is important to consider the actual purchasing power of money and not just pay attention to nominal amounts. This requires better financial education and a deeper understanding of economic relationships. By being aware of how inflation affects your personal financial situation, you can make more informed financial decisions and be more financially successful in the long term.