If you have money illusion, you walk away elated. If you fail to take the pay cut, she will be forced to fire you. The Keynesians Versus the Monetarists Keynesians believe that people have money illusion. They are slow to react to price increases and refuse to take pay cuts, even though prices may be falling. The presence of money illusion partly justifies the stickiness of prices when demand falls, so that market adjustments are in quantities, not prices.
Monetarists believe that people have no money illusion.
They are respond very quickly to price increases and realize the rationality of taking pay cuts when prices are falling. The absence of money illusion partly justifies the stickiness of quantity when demand changes, so that market adjustments are in prices, not quantities.