The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system, and real variables are not.

Classical Dichotomy

The theoretical separation of nominal and real variables in the economy, suggesting that changes in the money supply only affect nominal variables.

Nominal Variables

Economic variables measured in current prices, without adjusting for inflation, reflecting their value in terms of current money.

Real Variables

Economic variables that have been adjusted for inflation, allowing for the comparison of quantities over time.