The Mathematical Theory of Interest

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The Mathematical Theory of Interest
Introduction
Money is a channel through which goods and services can be exchanged, payments made, and values measured. An individual uses the asset for the purchase of products and services. Economically, the amount of money in a society determines inflation and interest rates. Money has several functions when budgeting, future payments, storage of wealth, determination on national income, the basis of credit creation, and promotion of foreign exchange. Most people work to have money in physical cash, liquid cash, or assets.
Money has five major stages in its evolution, beginning from the earliest form in which goods and services were exchanged with other goods. It is mostly known as commodity money. It proceeds to metallic money, which is in the form of gold, metal, and silver. Metallic money exists in three folds since it cannot be eliminated from the economic system; they are full-bodied money, token money, and tender money. The third stage of evolution of money is the paper money, which exists in the form of notes; these special notes are in different colors, values, and sizes fundamentally issued by the state banks. Their values differ depending on the strength of an economy. The fourth stage is bank money, which plays an essential role in economic development; they exist in the form of cheese, drafts, and bills of exchange. The final stage of money evolution is through electronics based on technological advancement, which makes transactions fast and reliable. On several occasions, people use credit and debit cards to facilitate their purchases. Good money must be acceptable, transferable, stable, storable, recognized, malleable, divisible, durable, economical, elastic, and homogeny. Without these qualities, money cannot have any effect on society. However, the barter system had several challenges that were later sorted with the introduction of money. These forms of money confirm how the commodity of trade plays an essential role in wealth creation and transfer.
The Classical Theory of Inflation
From history, prices increased in 60 years on a record of 5% per year and 7% per year in the 1970s. The US experienced deflation in the 19th century, and Germany consequently experienced hyperinflation in the 1920s. Inflation generally concerns the economy and can be explained through the amount of cash, which influences the inflation speeds. Money supply, demand, and monetary equilibrium are essential in this theory. People typically have money depending on the costs of commodities, which simultaneously adjust considering the demand. Therefore the value of the currency is a factor from the amount of money in the economy. The velocity of money (V) is determined by the product of price level (P) and the quantity of output (Y) over the quantity of money (M). Inflation tax happens when states produce more cash, and then revenues are raised. This can only be corrected through the fisher effect.
However, the fundamental reason for inflation is the increase in the amount of currency in the econ...