Money equations/time value of money

Time Value of Money

Is a dollar today worth more than a dollar tomorrow? Yes, because of opportunity cost and inflation. This is the reason for charging and paying interest.

V= future value of money

P= present value of money

R= real interest rate (nominal – inflation rate) expressed as decimal

N= years

K= number of times interest is credited per year

Simple interest formula= v = ((1+r) ^n) * p

Compound interest formula= v= ((1+(r/k)) ^NK)*p

Monetary equation of exchange

                MV= PQ

                                M= money supply (M1 or M2)

                                V= money’s velocity

                                P= price level (PL on the AS/AD diagram)

                                Q= real GDP (sometimes labeled Y on the AS/AD diagram)

7 functions of FED

                Issues out paper currency

                Sets reserve requirements and holds reserves of banks

                Lends money to banks and charges them interest

                Check clearing service for banks

                Act as personal bank for the government

                Supervises member banks

                Controls money supply in the economy