contrary to more recent macroeconomic theories such as the "expectations-augmented Phillips curve". If workers use their nominal wage as a reference point when evaluating wage offers, firms can keep real wages relatively lower in a period of high inflation as workers accept the seemingly high nominal wage increase. These lower real wages would allow firms to hire more workers in periods of high inflation. Money illusion is believed to be instrumental in the Friedmanian version of the Phillips curve. Actually, money illusion is not enough to explain the mechanism underlying this Phillips curve. It requires two additional assumptions. First, prices respond differently to modified demand conditions: an increased aggregate demand exerts its influence on commodity prices sooner than it does on labour market prices. Therefore, the drop in unemployment is, after all, the result of decreasing real wages and an accurate judgement of the situation by employees is the only reason for the return to an initial (natural) rate of unemployment (i.e. the end of the money illusion, when they finally recognize the actual dynamics of prices and wages). The other (arbitrary) assumption refers to a special informational asymmetry: whatever employees are unaware of in connection with the changes in (real and nominal) wages and prices can be clearly observed by employers. The new classical version of the Phillips curve was aimed at removing the puzzling additional presumptions, but its mechanism still requires money illusion. See also Behavioural economics Fiscal Illusion Framing (social science) Homo economicus Map-territory relation References Further reading Thaler, Richard H.(1997) "Irving Fisher: Modern Behavioral Economist" in The American Economic Review Vol 87, No 2, Papers and Proceedings of the Hundred and Fourth Annual Meeting of the American Economic Association (May, 1997) Huw Dixon (2008), New Keynesian Economics, New Palgrave Dictionary of Economics New Keynesian macroeconomics. Heuristics Inflation Behavioral finance Cognitive biases