Diction means the kinds of words and grammar used in a work of literature. It can be very simple and straightforward, using childlike vocabulary and sentence structure, or it can be complex in a variety of different ways.

The Great Gatsby is told through the first-person narrative of Nick Carraway, and its diction reflects his lyrical mindset. The words he uses are often poetic and rhythmic. For example, he refers to the people who surrounded Gatsby as "foul dust," a metaphor (or comparison) that puts a visual image in our minds. This is more poetic than simply saying Gatsby was surrounded by bad people.

Nick's lyrical diction does much to elevate Gatsby and surround him with a tragic grandeur. Through Nick's eyes, Gatsby becomes much more than a criminal grifter trying to use his ill-begotten wealth to buy back a woman he loved. Instead, Gatsby becomes a symbol of the American dream. Nick describes him as follows in rhythmic and poetic prose:

there was something gorgeous about him, some heightened sensitivity to the promises of life, as if he were related to one of those intricate machines that register earthquakes ten thousand miles away . . .

Nick's language or diction is often saturated with longing and loneliness, bathing the novel in a bittersweet light, whether he is describing wandering the streets of New York by himself after work, looking into windows as the light fades, repeating the bittersweet lyrics of popular songs about love and poverty, or recalling the idyllic winters in the midwest of his past. The diction is well-suited to a tragic story of failed dreams and desires.

The vocabulary used by the characters in The Great Gatsby is indicative of the slang used in the 1920's by a younger generation breaking free from old, outmoded values and beliefs of the WWI generation. The "flapper generation" depicted in the novel came up with its own way of talking, much like today's generation has its own vocabulary for certain words or ideas. The 1920's was also a decade that saw jazz become popular music. Young people danced the Charleston; women wore shorter skirts and cut their long hair into bobs during this Jazz Age. It was a time of loose morals and having fun at all costs. 
By using the diction of the 1920's, Fitzgerald places the novel in its social and historical context. This vocabulary keeps it true to the time period, and the novel will live on as a true artifact of the 1920's. The diction also makes the novel more believable as the characters represent a part of the culture in which they live. 

Some of the 1920's words you will find in The Great Gatsby are:

Attaboy (well done)
Doll (attractive female)
Gold digger (woman who uses a man for his money)
Jack (money)
Joe (coffee)
Tight (attractive)
Upchuck (throw up)
Whoopee (wild fun)
And, of course, Gatsby's favorite, "sport" (term of address)

The slang was so influential that we even use some of the words of the 1920's today! 

If a writer like Fitzgerald, wants to be true to a time period or era like the Roaring 20's, he will use realistic language and actions (like the lavish parties Gatsby hosted) to make his literary work more believable and unforgettable.