Money

Terms

Bartering - The trading of one good for another. This requires the double Coincidence of wants, a condition met when two individuals each have different goods that they other wants.

Commodity Money - Money that has an intrinsic value, that is, value beyond any value given to it because it is money. An example of this would be a gold coin that has value because it is a precious metal.

Compound Interest - Interest that is paid on a sum of money where the interest paid is added to the principal for the future calculation of interest. Click here to see the Formula.

Consumption - The purchase and use of goods and services by consumers.

Currency - The form of money used in a country.

Defaulting on the Loan - When a borrower fails to repay a loan leaving the lender without the money loaned.

Demand for Money - The amount of currency that consumers use for the purchase of goods and services. This varies depending mainly upon the price level.

Equilibrium - The state in a market when supply equals demand.

Fiat Money - Money that has no intrinsic value, that is, its only value comes from the fact that a governing body backs and regulates the currency.

Fischer Effect - The point for point relationship between changes in the money supply and changes in the inflation rate.

Inflation - The increase of the price level over time.

Interest - Money paid by a borrower to a lender for the use of a sum of money.

Interest Rates - The percent of the amount borrowed paid each year to the lender by the borrower in return for the use of the money.

Liquidity - The ease with which something of value can be exchanged for the currency of an economy.

Medium of Exchange - An item used commonly to trade for goods and services.

Money Supply - The quantity of money in an economy. In the US this is controlled through policy by the Fed.

Nominal GDP - The total value of all goods and services produced in a country valued at current prices.

Nominal Interest - The percent of the amount borrowed paid each year to the lender by the borrower in return for the use of the money not taking inflation into account.

Nominal Value - The value of something in current dollars without taking into account the effects of inflation.

Output - The amount of goods and services produced within an economy.

Price Level - The overall level of prices of goods and services in an economy. This is used in the calculation of inflation rates.

Purchasing Power - The real value of a dollar. This describes the quantity of goods and services that can be purchased for a dollar, taking into account the effects of inflation.

Quantity Theory of Money - The theory that says that the value of money is based on the amount of money in circulation, that is, the money supply.

Real Interest - The percent of the amount borrowed paid each year to the lender by the borrower in return for the use of the money adjusted for inflation.

Real Value - The value of something in taking into account the effects of inflation.

Store of Value - A good that holds a value in such a way that its price is fairly insensitive inflation.

Unit of Account - Something that is used universally in the description of money matters such as prices. The unit of account most commonly used in the US is the dollar.

Value of Money - The purchasing power of the dollar. The amount of goods and services that can be purchased for a fixed amount of money.

Velocity - The speed with which a dollar bill changes hands. The higher the velocity of money, the quicker that a given piece of currency will be traded for goods and services.

Wage - The amount of money paid to workers by employers valued in current dollars.

Velocity of Money

M * V = P * Y where M is the money supply, V is the velocity, P is the price level, and Y is the quantity of output. P * Y, the price level multiplied by the quantity of output, gives the nominal GDP. This equation can be rearranged as V = (nominal GDP) / M. It can also be converted into a percentage change formula as (percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in output).

Compound Interest

First, calculate the value of the loan, by adding one to the interest rate, raising it to the number of years for the loan, and multiplying it by the loan amount. Then, to calculate the amount of interest, simply subtract the original loan amount from the total due.

Real Interest Rate

The real interest rate is equal to the nominal interest rate minus the inflation rate.