According to the Fed model, inflation illusion leads investors to apply a modified Gordon growth formula:-

http://web.stanford.edu/~piazzesi/illusion.pdf?hc_location=ufi

According to the Fed model, inflation illusion leads investors to apply a modified Gordon growth formula to determine the price-dividend ratio on long-lived assets: instead of using the real interest rate to discount future (real) cash flows as in the usual formula, investors discount at the nominal rate.