| Sumario: | A standard result of the theory of rational consumer behavior in a static monetary economy is that a consumers demand functions for commodities are homogeneous of degree zero in prices, money income and money wealth. Economist Don Patinkin has defined this condition as the absence of money illusion. People whose demands for commodities would be altered by an equiproportionate change in all prices, money income and money wealth are said to suffer from money illusion. Aggregating over all commodities purchased by the consumer, this standard theorem leads to the conclusion that an individual's total real consumption demand is homogeneous of degree zero in prices, money income and money wealth. Finally, aggregating over all consumers, this result would imply that the economy's aggregate real consumption should be a function of aggregate real income and aggregate real wealth, but not the price level. It would be most useful to introduce the money illusion consumption function into a complete simultaneous equation model.
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