Time Value of Money

Time value of money 

Time Value of Money

Is a dollar today worth more than a dollar tomorrow?
- yes

• Inflation
• opportunity cost and inflation
• this is the reason for  changing and paying interest

Let V= future VALUE of prices
P= PRESENT VALUE of prices
R= REAL INTEREST RATE (Nominal rate- inflation rate) express as a decimal
n= YEARS
K= Number of times interest is credited per year

Simple Interest Formula

V=( 1+ R)^n x P

Compound Interest Formula
V=(1+R/K)^nk x P

R% = 1 % - pie%

Monetary Equation of Exchange
MV=PQ
-M= Money supply (M1 or M2)
-V Money's Velocity (M1 or M2)
-PL= Price Level (PL on the AS/AD diagram)
-Q= Real GDP ( sometimes labeled Y on the AS/AD diagram)