Money, Banking, and the Economy

Money

Serves as a means of payment, a unit of account, and a store of value.

Liquidity

A measure of how easily an asset can be converted into cash without affecting its market price.

Nominal GDP

Gross Domestic Product calculated with current prices and current quantities.

Real GDP

Gross Domestic Product calculated with base year prices and current quantities, removing the impact of inflation.

Commodity Money

Currency that has some inherent non-money value to everyone, cannot be easily created, and prevents inflation but may cause deflation.

Fiat Money

Currency with no inherent value; its value comes from the belief that others will accept it. It can be easily created, carrying a risk of inflation.

Gold Standard

A monetary system where paper currency is backed by gold, with the central bank fixing the price of gold. It limits inflation but removes control over money supply growth.

Gross Domestic Product (GDP)

The total expenditure during a time period on new domestically-produced final goods and services, calculated as Y = C + I + G + NX.

GDP Deflator

A price index calculated as (Nominal GDP / Real GDP) x 100, which includes all final goods and services but ignores imports.

Producer Price Index (PPI)

Measures the wholesale price of physical goods before markup, ignoring imports.

Consumer Price Index (CPI)

A price index based on a typical consumption basket.

Personal Consumption Expenditure (PCE) Price Index

A price index based on prices of all goods in the consumption component (C) of GDP, ignoring houses which are in investment (I).

Inflation

The rate of increase in the general price level, calculated as ((Pt - Pt-1) / Pt-1) x 100.

Issues with CPI

Include technological improvements, outlet bias