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Encyclopedia > Nominal money

Nominal money, in economics, is the quantity of money measured in a particular currency, and is directly proportional to the price level. Economics (deriving from the Greek words οίκω [oeko], house, and νέμω [nemo], distribute) is the social science that studies the allocation of scarce resources through measurable variables. ...

This means, among other things, that if the price level rises by 10%, people hold 10% more money than before. (ceteris paribus)

For example, if you hold \$20 to buy pizza, and the price level increases by 10%, you essentially increase your money holding by \$2, totaling \$22.

Real money is the quantity of money measured as a constant (eg: the value of the dollar in 1997), and relates to the above as follows:

Nominal money = Price level * Real money.

Hence Real Money = Nominal money/Price Level, and is the quantity of money measured in terms of what it will buy.

Thus, your \$22 at the new price level will buy you the same amount of goods and is the same quantity of real money as your \$20 at the original price level.

Results from FactBites:

 Intermediate Macroeconomics - Money Demand (7445 words) Money can be held as either liquid M1 money (cash or checkable deposits) or in non-money investment assets that pay a rate of return through interest or increases in value but cannot be used as a medium of exchange. Nominal money demand is a negative function of the nominal interest rate as we expected. Money demand may be slow to change because of adjustment costs, expectations may be slow to adjust, or expectations may hold that a change in income or interest rates is in part temporary.
 Real versus nominal value - Wikipedia, the free encyclopedia (460 words) Nominal value is the value of anything expressed in money of the day, versus real value which removes the effect of inflation. Nominal numbers - such as nominal wages, interest rates and gross domestic product (GDP) - refer to amounts that are paid or earned in money terms. Nominal GDP refers to the amount of money spent to buy the production of a country.
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