Nominal vs. Real distinctions affect cycle analysis and policy implications. Nominal: Measured in current prices (not adjusted for inflation); includes inflation effect. Real: Adjusted for inflation (constant prices); shows actual quantity changes. Nominal GDP: Sum of final goods at current prices; rises with both output and inflation. Real GDP: Same goods at constant prices; rises only with output growth, removes inflation effect. Real wage: Nominal wage divided by price level; shows purchasing power change. Real interest rate: Nominal rate minus inflation; shows true borrowing/lending return. Important distinction: Nominal variables can increase from inflation alone (misleading); real variables show true economic activity. Cycle in nominal vs. real: Real cycle reflects actual output fluctuations; nominal adds inflation variation. Inflation cycle: Often procyclical (rises in expansion, falls in recession); related to demand pressure. Real vs. nominal interest rates: Central banks care about real rates for economic impact; nominal rates observed. Policy implications: Real variables guide policy (real interest rates affect real investment); nominal variables can be misleading. Deflation: Falling prices (negative inflation); rare but serious; increases real debt burden, discourages spending. Stagflation: Simultaneous inflation and stagnation (recession with inflation); challenges policy (expansionary worsens inflation, contractionary worsens recession). ICAI focus: Distinction for analysis, policy interpretation. Exam tip: Always ask "real or nominal?" when analyzing; nominal increases can hide declining real activity; deflation is serious problem.