Money & Prices: key terms, formulas and examples
Money and prices move together: inflation lowers purchasing power, interest rates set borrowing costs, and elasticity shows how demand reacts to price changes.
Example
Price up 10% and quantity down 20% means elasticity of 2.
Takeaway
Think in real values after inflation, not just nominal ones.
Key terms
- Inflation
- A general rise in prices that reduces what money can buy.
- Price elasticity
- How strongly demand reacts to a price change.
- Deflation
- A general fall in prices that raises money's buying power.
- Monetary policy
- Central bank actions on interest rates and money supply to steer the economy.
- Money supply
- The total amount of money in an economy.
- Central bank
- The institution managing a country's money and interest rates.
- Real interest rate
- The interest rate adjusted for inflation.
Formulas
Compound growthP × (1 + r)ⁿ
Price elasticity%ΔQ ÷ %ΔP
Inflation rate(CPI new − CPI old) ÷ CPI old × 100
Real GDPNominal GDP ÷ Deflator × 100
Unemployment rateU ÷ LF × 100
Money multiplier100 ÷ RR
Spending multiplier1 ÷ (1 − MPC)
GDP by spendingC + I + G + (X − M)
GDP per capitaGDP ÷ N
Budget deficitG − T
Debt-to-GDPD ÷ GDP × 100
Simple interestP × r × t
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