Understanding Economic Equilibrium

CHAPTER 28

Money Illusion: The Distinction Between Income and Buying Power

You’re a U.S. citizen traveling abroad, in a spice market in Mumbai. Because you’re not sure of the exchange rate, you don’t have a good feel for whether what you’re buying is expensive or cheap. How much is eight thousand rupees? You’re trying to measure the cost in terms of dollars, but since the price is expressed in a currency you aren’t familiar with, you can’t immediately or easily make that judgment. What you are interested in is the real price of the product, but what you are told is the nominal price. The real price of the good is hidden behind the “veil of money” and seeing through that veil is not always easy.

The same can be true when the currency is familiar. ...