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.

What is the difference between nominal and real interest rates?
Explain the relationship between the interest rate and investment
by graph. If the interest rate increases how does change
investment, aggregate demand (AD) and output? Why?

Explain the difference between nominal variables and real
variables giving two examples of each. According to the classical
dichotomy, which of these two sets of variables are affected by a
change in money supply.

What is the difference between nominal and real interest rates
and why should you care?

Explain the difference between nominal and real GDP and why real
GDP is necessary to compare prior years’ data.

This exercise deals with the difference between nominal and real
GDP, and also explores the characteristics of the components of GDP
over time.
Show all work and formulas
Instructions
Go to BEA.gov and in the U.S. Economic Accounts find Table
1.1.5 (nominal GDP) and Table 1.1.6 (real GDP) and download them
for the period 1960 to the latest available year in annual
frequency (yearly).
In Excel plot line 1 of both tables within a single graph.
Where do they cross?...

1) Explain what is the difference between
real and nominal GDP?
2 ) and explain why do
economists need to make this distinction?
3) Is
the CPI a biased measure of the inflation rate? Explain your
answer.

Explain the difference between nominal and real GDP. Which of
the two is a better measure of economic growth? Why?

Question One: Distinguish between the nominal and real rates of
interest using an example.
Question Two: Why does an entrepreneur deserve to be compensated
with profit?

3. Distinction Between Real and Nominal Interest Rates
a. Distinguish between a nominal versus a real interest
rate.
b. If a bond gives you a 4% nominal annual interest rate and the
inflation rate over the year is 2%, what is the real ex post rate
of return you receive? Real Rate You Receive _______________
c. If an investor wants a real rate of return of 2% and expects
inflation to be 2% next year, what nominal rate should the...

1. Explain the difference between real GDP and nominal GDP.
2. Discuss the reasons that explain why GDP is not a perfect
measure of economic activity in a country (hint, there are four
main reasons
3. What does GDP per capita tell us about a nation's economy?
What issues does conventional GDP methodology exclude?
4. Explain how “good institutions” enhance the incentives for
entrepreneurship
5. Why are property rights important for economic
development?

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