How Intercoolers Work 
What the Turbocharger does for the Merkur:
The power that an engine generates in proportional to the air throughput.  Because air throughput is, in turn, proportional to air density, the power of an engine with constant displacement and engine speed can be increased by precompression of the air before it enters the cylinders.  The supercharging ratio indicates the increase in density compared to a normally aspirated engine.  The supercharging ratio depends on the equipment type used (in this case, a turbocharger) and is the greatest given a specific increase in pressure when the temperature of the compressed air is not increased or is returned to its initial value by intercooling.In gasoline engines, the supercharging ratio is limited by the knocking tendency of the engine.  In order to minimize this problem, turbocharged engines customarily use lower compression ratios than normally aspirated engines.

Intercooling, or charge air cooling, performs two major functions:

1. The increase in density as the temperature drops can be converted into increased performance.
2. The lower temperature tends to raise the knock limit of the engine. Other benefits of the lower charge air temperature are lower exhaust gas temperatures, reduced NOx content, and a reduction in the thermal load on the engine.

Intercooler basics:
    With an intercooler, the hot, pressurized air is passed through a heat exchanger and cooled.  This results in cooler, denser air.  This helps because you can run higher boost before encountering detonation with the cooler air.  The air is also denser which means that the air packed into the cylinder is more dense than it would be at the same pressure and a higher temperature.
The result is that you can run higher boost before encountering detonation.  You will have more power and the engine will run cooler all the time since air is being removed from the system.  Also since it mainly is cooling when the engine is under boost, it really doesn't do much when you are going down the highway, meaning that it will not significantly affect cruising mileage.  The only real downside that I experienced was the added cost/ complexity that the intercooler adds.  This is probably the main reason that some kind of intercooler wasn't original equipment on the Merkurs.

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