What is the difference between nominal variables and real variables? Discuss the calculations undertaken to determine the real wage rate and the real interest rate. Explain why the real wage rate and real interest rate are real variables

What will be an ideal response?

Nominal variables are measured using current dollars; real variables are measured using dollars of a given base year. More generally, nominal variables are in terms of current dollars whereas real variables are in terms of the quantity of goods and services that can be purchased. The real wage rate equals the nominal wage rate divided by the CPI. The real interest rate equals the nominal interest rate minus the inflation rate. The real wage rate is a real variable because it provides the purchasing power of an hour's labor. The real interest rate is a real variable because it provides the purchasing power gained as interest on a loan.