Journal Article Private Constant Returns and Public Shadow Prices Get access P. Diamond, P. Diamond MIT and Nuffield College, Oxford Search for other works by this author on: Oxford Academic Google Scholar J. Mirrlees J. Mirrlees MIT and Nuffield College, Oxford Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 43, Issue 1, February 1976, Pages 41–47, https://doi.org/10.2307/2296598 Published: 01 February 1976 Article history Received: 01 March 1975 Accepted: 01 May 1975 Published: 01 February 1976

The term “money illusion” refers to a tendency to think in terms of nominal rather than real monetary values. Money illusion has significant implications for economic theory, yet it implies a lack of rationality that is alien to economists. This paper reviews survey questions regarding people's reactions to variations in inflation and prices, designed to shed light on the psychology that underlies money illusion. We propose that people often think about economic transactions in both nominal and real terms, and that money illusion arises from an interaction between these representations, which results in a bias toward a nominal evaluation.