- Nominal money
This means, among other things, that if the price level rises by 10%, 10% more money than before is necessary in order to maintain stability. For example, if it costs $20 to buy an item, and the price level increases by 10%, the dollar amount necessary to buy the item increases by 10% (in this case by $2), which brings the total cost of the item to $22.
Real money is the quantity of money measured as a constant (e.g. the value of the dollar in 1997), and it relates to Nominal money as follows:
Nominal money = Price level * Real money.
Real Money = Nominal money/Price Level,
where Real Money is the quantity of money measured in terms of what it will buy. Thus, $22 at the new price level will buy the same amount of goods as $20 at the original price level.
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