Economics: Money, Inflation, and Unemployment Key Concepts

Double Coincidence of Wants

Situation needed for barter where both parties must want what the other has.

Store of Value

Money's ability to be saved and used later.

Unit of Account

Standard measurement of value for goods and services.

Medium of Exchange

An item used to buy and sell goods and services.

Characteristics of Money

Durable, divisible, countable, portable, and scarce.

Commodity Money

Money that has value on its own (ex: gold, silver).

Fiat Money

Government-declared legal tender with no intrinsic value and not backed by a commodity.

Inflation

An increase in the overall price level.

Deflation

A decrease in the overall price level.

Value of Money

Purchasing power; how much goods and services money can buy.

Money Supply

Total amount of money in an economy.

Consumer Price Index (CPI)

Measures average change over time in prices paid by urban consumers for a market basket of goods and services.

Adjusting for Inflation

Making price comparisons over time more meaningful by accounting for inflation.

Weighted Average

An average where some items count more than others.

New Goods Bias

When new products cause the CPI to overstate inflation.

Quality Goods Bias

When improvements in product quality cause CPI to overstate inflation.

Nominal Interest Rate

Interest rate not adjusted for inflation.

Real Interest Rate

Interest rate adjusted for inflation.

Nominal Wages

Wages not adjusted for inflation.

Real Wages

Wages adjusted for inflation.

Fisher Effect

Nominal interest rates tend to rise with inflation.

Labor Force Participation Rate

Percentage of adults who are in the labor force.

Labor Force

Employed + unemployed people actively looking for work.

Unemployed

Adults without a job who are actively looking for work.

Unemployment Rate

Percentage of the labor force that is unemployed.

Discouraged Workers

People who stopped looking for work but still want a job.

Frictional Unemployment

Short-term unemployment due to job searching or matching workers to jobs.

Structural Unemployment

Long-term unemployment caused by changes in the economy or technology.

Cyclical Unemployment

Unemployment caused by economic downturns or the business cycle.

Natural Rate of Unemployment

Unemployment rate with no cyclical unemployment (frictional + structural).

Long-Term Unemployment

Unemployment lasting longer than six months.