
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.
