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The Foundations of Money Illusion in a Neoclassical Micro-Monetary Model.

This article discusses the microeconomic foundations of money illusion. Within a general neoclassical micro-monetary model of individual utility maximization, where money and commodity prices enter the objectives function, it is important to provide general conditions for the existence of demand fun...

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Published in:American Economic Review Vol. 64; no. 1; pp. 115 - 123
Main Authors: Dusansky, Richard, Kalman, Peter J.
Format: Article
Published: American Economic Association Mar1974
Subjects:
Economic demand
Microeconomics
Demand function
Elasticity (Economics)
Utility functions
Fiscal policy
Monetary policy
Economic policy
Online Access:View this record in EBSCOhost
Summary:This article discusses the microeconomic foundations of money illusion. Within a general neoclassical micro-monetary model of individual utility maximization, where money and commodity prices enter the objectives function, it is important to provide general conditions for the existence of demand functions which are free of money illusion. It is necessary to consider the general formulation of consumer utility maximization when real balances enter the utility function. Moreover, it is very crucial to examine the solutions to the first-order conditions and to determine whether these solutions become altered in response to the equi-proportionate change.