Originally, the expression evokes someone who seems far away from here, with a lost gaze, as if his attention were elsewhere. The image suggests a physical presence without mental presence, which creates a striking sense of mismatch. It belongs to the field of Idioms, where the literal meaning goes beyond the meaning of the words taken one by one.
In common usage, being in the moon means being distracted, dreamy or inattentive in the present moment. The expression describes someone who zones out, who loses the thread or who doesn't really listen to what is going on around them. It is related to Daydreaming, to Lose The Thread and to Being Distracted.
The expression is familiar and common, and it is especially suitable for informal conversations, exchanges among friends, at school or in the office in a light tone. In Quebec and in several Francophone regions, ĂȘtre dans les nuages is used quite naturally as well. In formal contexts, it is better to prefer distracted or inattention, especially in a professional remark.
In conversation, the expression often appears to apologize, to prompt someone, or to comment on a small lapse in attention. One should avoid translating it literally into English as 'in the moon,' because French uses a different image. In a lively and spontaneous scene, it sounds natural and light, as in the dialogues of Stand Someone Up or of Put Your Foot In Your Mouth.