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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.
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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.
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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.
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Consumption
The purchase and use of goods and services by consumers.
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Currency
The form of money used in a country.
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Defaulting on the Loan
When a borrower fails to repay a loan leaving the lender without the money loaned.
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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.
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Equilibrium
The state in a market when supply equals demand.
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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.
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Fischer Effect
The point for point relationship between changes in the money supply and changes in the inflation rate.
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Inflation
The increase of the price level over time.
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Interest
Money paid by a borrower to a lender for the use of a sum of money.
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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.
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Liquidity
The ease with which something of value can be exchanged for the currency of an economy.
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Medium of Exchange
An item used commonly to trade for goods and services.
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Money Supply
The quantity of money in an economy. In the US this is controlled through policy by the Fed.
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Nominal GDP
The total value of all goods and services produced in a country valued at current prices.
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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.
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Nominal Value
The value of something in current dollars without taking into account the effects of inflation.
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Output
The amount of goods and services produced within an economy.
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Price Level
The overall level of prices of goods and services in an economy. This is used in the calculation of inflation rates.
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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.
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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.
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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.
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Real Value
The value of something in taking into account the effects of inflation.
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Store of Value
A good that holds a value in such a way that its price is fairly insensitive inflation.
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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.
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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.
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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.
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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. |
