The film is set in East Berlin, from October 1989 to just after German reunification a year later.
Alex lives with his sister, Ariane, his mother, Christiane, and Ariane's infant daughter, Paula. It appears that his father abandoned the family and fled to the West in 1978. In his absence, Christiane has become an ardent supporter of the ruling Socialist Unity Party of Germany (the Party). On the other hand, Alex is disgusted with the drab celebration of East Germany's 40th anniversary and participates in an anti-government demonstration.
There he meets a girl, but they are separated by the Volkspolizei before they can properly introduce themselves.
When Christiane sees Alex being arrested, she suffers a near-fatal heart attack and falls into a coma.
While visiting his mother in the hospital, Alex encounters the girl he met in the demonstration, Lara, a nurse from the Soviet Union who is now caring for his mother. Alex and Lara soon begin dating and develop a close bond.
Shortly afterward, the Berlin Wall falls, Erich Honecker resigns from office, and capitalism comes to East Berlin.
Alex loses his job as a TV repairman, but is hired by a West German cable company. Alex is paired with Denis Domaschke, an aspiring West German filmmaker with whom Alex quickly becomes good friends. When Ariane's university closes, she then works at a Burger King drive-through.
After eight months, Christiane awakens from her coma, but she is severely weakened and her doctor warns that any shock might cause another, possibly fatal, heart attack.
Alex realises that the discovery of recent events would be too much for her to bear, and decides to maintain the illusion that things are as before in the German Democratic Republic. In order to do so, Alex, Ariane and Lara revert their West decor to the decor they previously had in the bedroom of their now bed-ridden mother in the family apartment, dress in their old clothes, and repackage new Western products in old East German jars.
Their deception is successful, though increasingly complicated as Christiane occasionally witnesses strange occurrences, such as a gigantic Coca-Cola advertisement banner. With Denis' help, Alex edits old tapes of East German news broadcasts and creates fake reports to explain these odd events.
Christiane eventually gains strength and wanders outside one day while Alex is asleep. She sees all her neighbours' old furniture piled up in the street, advertisements for Western corporations, and a statue of Lenin being flown away by a helicopter.
However, Alex and Ariane quickly take her home and show her a fake report that East Germany is now accepting refugees from the West following a severe economic crisis there.
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