Question

What is the difference between real and nominal variables and why is the difference important? Exlain using one of the components of aggregate demand as an example.

Answer 1

Nominal values of something is the money value attaches to it in different years. For example - income. Nominal income is something which you get and equal to its money value.

Real values adjusts the difference in the price values in those years. For example - real income. To find the real income one has to divide the minimal income to the prices/inflation to get the real increase his income. It allows comparison when two periods have different level of prices.