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251. Explain what nominal interest rate means.
251. What is the Nominal Interest Rate?
The nominal interest rate refers to the rate of interest before adjusting for inflation. It also refers to the rate specified in the loan contract without adjusting for compounding. The nominal interest rate is in contrast to the real interest rate regarding the inflation adjustment and effective interest rate regarding the compounding adjustment.
Nominal interest rates can be impacted by different factors, including the demand and supply of money, the action of the federal government, the monetary policy of the central bank, and many others.
Central banks implement the short-term nominal interest rate as a tool of monetary policy. During an economic recession, the nominal rate is lowered to stimulate economic activities. During inflationary periods, the nominal rate is raised.
What is the Nominal Interest Rate?
The nominal interest rate is the interest percentage stated in a contractual lending arrangement. This interest rate is not adjusted for the effects of inflation, so the return to the lender could be negative, if the inflation rate is higher than the nominal interest rate. Consequently, a lender must build inflationary expectations into the interest rate associated with a loan, or include a clause that adjusts the nominal interest rate for the effects of inflation.
Example of the Nominal Interest Rate
For example, if the inflation rate is 10% and the nominal interest rate is 8%, the lender will experience a negative return of 2%
252. What Is a Medium of Exchange?
Take a minute and ask yourself, when was the last time you paid for an item or service using something other than money? Chances are, you can't think of a time when money wasn't your first choice while shopping in a store. Whether it be cash, credit card or check, money is usually the main form of payment one uses when making a purchase. Well, that form of payment is what we call a medium of exchange.
In order to fully understand this term, we need to start with the basics. For starters, let's clarify the definition of money. Money is a form of payment used and accepted to pay for goods and services. When money is used to facilitate a sale, it becomes a medium of exchange. This exchange is done between two parties when one individual has a good or service to sell and another individual wants buy that good or service. Money is the typical currency utilized in modern economies, so let's take a closer look at how money functions.Money serves as a medium of exchange, or a thing that buyers exchange with sellers for goods, in the economy. In this lesson, explore the function of money, learn how it works in economic contexts, and review a few examples.
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Money is a particular type of asset in an economy that people use to buy goods and services from other people or businesses. A medium of exchange is something that buyers will exchange with a seller when they want to purchase goods or services from the seller. While many things could be used as a medium of exchange in an economy, money is the most common and useful medium of exchange in our society.
Functions of Money as a Medium of Exchange
Because this lesson's main focus is on a medium of exchange, we will focus on that function first. I will then explain the other two functions as they relate to money as a medium of exchange.
When money is used to exchange goods and services, it is functioning as a medium of exchange. Money is used as a medium of exchange because both the buyer and the seller understand the value. This is beneficial because neither party is confused about its worth. For example, if one were to offer a cow as payment for a meal at McDonald's, there may be some confusion about the value of the cow. The buyer might think the cow is worth enough for the meal, but McDonald's may not agree.
The best example of a medium of exchange is currency and the whole purpose of it is to facilitate trading activities. By providing an element that has a known and collectively-agreed value of exchange the medium of exchange becomes a generally accepted way to settle economic transactions
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