Macroeconomics

‭Assuming‬‭that‬‭in‬‭the‬‭previous‬‭example‬‭the‬‭nominal‬‭interest‬‭rate‬‭is‬‭4%‬‭and‬‭the‬‭inflation‬‭rate‬‭is‬‭1%,‬‭we‬‭can‬ ‭deduce that the real interest rate is 3%.‬

‭Therefore, PV = $220/(1 + 0.03)² ≈ $207.37.‬

‭This means that the $220 that will be received in two years is in reality worth around $207.37.‬

‭The‬‭present‬‭value‬‭of‬‭money‬‭demonstrates‬‭how‬‭interest‬‭rates‬‭can‬‭be‬ ‭used‬ ‭to‬ ‭compare‬ ‭the‬ ‭value‬ ‭of‬ ‭money‬ ‭received‬ ‭today‬ ‭to‬‭the‬‭value‬‭of‬ ‭money‬‭received‬‭in‬‭the‬‭future.‬ ‭This‬‭concept‬‭helps‬‭determine‬‭how‬‭much‬ ‭money‬‭would‬‭be‬‭needed‬‭right‬‭now‬‭to‬‭be‬‭equally‬‭well‬‭off‬‭as‬‭having‬‭more‬ ‭money‬‭in‬‭the‬‭future.‬‭In‬‭simple‬‭terms,‬‭it‬‭helps‬‭us‬‭understand‬ ‭the‬‭current‬ ‭worth‬ ‭of‬ ‭future‬ ‭money‬ ‭.‬ ‭This‬ ‭is‬ ‭important‬ ‭because‬ ‭the‬ ‭money‬ ‭held‬ ‭in‬ ‭hands‬ ‭today‬ ‭is‬ ‭typically‬ ‭worth‬ ‭more‬ ‭than‬ ‭the‬ ‭same‬ ‭amount‬ ‭of‬ ‭money‬ ‭that might be received in the future.‬ ‭On‬‭the‬‭other‬‭hand,‬‭the‬ ‭future‬‭value‬ ‭of‬‭money‬‭illustrates‬‭how‬‭money‬‭can‬‭grow‬‭over‬‭time‬‭when‬‭saved‬‭or‬ ‭invested.‬ ‭FV = PV (1 + i)‬ ‭ⁿ‬ ‭For‬ ‭instance,‬‭if‬‭one‬‭invests‬‭$100‬‭in‬‭a‬‭savings‬‭account‬‭that‬‭pays‬‭a‬‭5%‬‭annual‬‭interest‬‭rate‬‭and‬‭wants‬‭to‬ ‭know how much this amount will grow in 3 years, the future value should be calculated as follows:‬ ‭FV = $100 (1 + 0.05)‬ ‭≈ $115.76. So, this is the‬‭amount this person will have in three years.‬ ‭³ ‬‭‬ ‭C. Measures of Money Supply‬ ‭After‬‭establishing‬‭the‬‭concept‬‭of‬‭money,‬‭the‬‭next‬‭step‬‭is‬‭to‬‭measure‬‭an‬‭economy's‬‭money‬‭supply.‬‭Given‬ ‭that‬‭various‬‭assets‬‭can‬‭have‬‭the‬‭same‬‭functions‬‭as‬‭money,‬‭economists‬‭have‬‭devised‬‭distinct‬‭labels‬‭for‬ ‭various‬ ‭measures‬ ‭of‬ ‭money‬ ‭to‬ ‭establish‬ ‭a‬ ‭clear‬ ‭boundary,‬ ‭designating‬ ‭what‬ ‭constitutes‬ ‭money‬ ‭and‬ ‭distinguishing it from other assets.‬ ‭Monetary‬‭aggregates‬ ‭represent‬‭an‬‭overall‬‭measure‬‭of‬‭the‬‭money‬‭supply‬‭that‬‭includes‬ ‭different‬‭forms‬ ‭of‬ ‭money‬ ‭categorized‬ ‭based‬ ‭on‬ ‭liquidity‬ ‭(how‬ ‭easy‬ ‭they‬ ‭can‬ ‭be‬ ‭converted‬ ‭into‬ ‭cash).‬ ‭The‬ ‭most‬ ‭commonly used aggregates or measures of money supply are M1 and M2.‬ ‭1.‬ ‭M1‬ ‭(Narrow‬ ‭Money‬ ‭or‬ ‭Transactions‬ ‭Money):‬ ‭M1‬ ‭is‬ ‭the‬ ‭narrowest‬ ‭measure‬ ‭of‬ ‭money‬‭supply,‬ ‭focusing‬‭on‬‭the‬ ‭most‬‭liquid‬‭and‬‭readily‬‭accessible‬ ‭forms‬‭of‬‭money.‬‭In‬‭other‬‭words,‬‭this‬‭is‬‭the‬ ‭money‬ ‭that‬ ‭can‬ ‭be‬ ‭directly‬ ‭used‬ ‭to‬ ‭buy‬ ‭things‬ ‭(i.e.,‬‭for‬‭transactions).‬‭It‬‭includes‬‭the‬‭following‬ ‭components:‬ ‭ ➔ ‬ ‭Currency‬ ‭in‬ ‭Circulation:‬ ‭This‬‭is‬‭the‬‭physical‬‭cash‬‭(coins‬‭and‬‭paper‬‭money)‬ ‭held‬‭by‬‭individuals‬ ‭and‬ ‭businesses‬ ‭in‬ ‭an‬ ‭economy.‬ ‭It‬ ‭represents‬ ‭money‬ ‭that‬ ‭is‬ ‭immediately‬ ‭available‬ ‭for‬ ‭transactions‬ ‭outside the central banks and vaults‬‭of depository institutions.‬

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