Nominal aggregate demand (AD) refers to total spending in money terms, ie in pounds or dollars, whereas real aggregate demand refers to total spending in terms of the volumes of goods and services purchased.
Suppose that nominal or money AD was £1 billion in 2012 and then £1.1 billion in 2013, ie it increased by 10%. If average prices increased by 5% between 2012 and 2013, then the volume of goods and services purchased, ie the real level of AD, will have increased by only 5%. So, consumers will on average only be about 5% better off in real terms in 2013 compared to 2012.
Essentially, all that happens in the accelerationist theory of inflation model is that the government increases spending, which leads to an increase in nominal AD. This leads to an increase in GDP and in inflation (to 3% say) and a decrease in unemployment, particularly as workers' expectations of inflation lag actual inflation by a year. Next year, however, workers realise that inflation has increased to 3% and so demand and gain a 3% wage increase to catch up with inflation. As wages have now caught up with prices, the economy reverts back to the original equilibrium levels of output and employment, but with 3% inflation (for both prices and wages).
If the government thinks unemployment is again too high, it again increases its spending further, leading again to a increase in GDP and a further increase in inflation (to 6% say). Once again unemployment falls, as workers' expectations of inflation lag actual inflation by a year - they still expect 3%. The following year, workers once again realise that inflation has increased, now to 6% and so demand and gain a 6% wage increase to catch up with inflation. As wages have now caught up with prices, the economy reverts back to the original equilibrium levels of output and employment, but with 6% inflation (for both prices and wages).
This process or ever-increasing inflation will continue so long as the government continues to try and reduce unemployment by increasing its spending.
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