Interest rates
Definition
Interest rates refer to the cost or price paid for borrowing money or using credit, usually expressed as a percentage per year. They represent how much extra you need to pay back on top of what you borrowed.
Analogy
Think about interest rates like renting money from someone else's piggy bank. When you borrow money, you have to pay rent (interest) for using that person's savings until you return it.
Related terms
Federal Reserve (Fed): The Fed is responsible for setting monetary policy in the United States, including controlling short-term interest rates through its actions such as adjusting reserve requirements or buying/selling government securities.
Prime Rate: The prime rate is the interest rate that commercial banks charge their most creditworthy customers. It serves as a benchmark for other interest rates in the economy.
Compound Interest: Compound interest is when you earn or pay interest not only on the initial amount of money but also on any accumulated interest. It allows your savings or debt to grow faster over time.
"Interest rates" appears in:
Study guides (5)
Practice Questions (6)
- How do the prices of bonds change in relation to interest rates?
- What happens to the quantity of money demanded when interest rates increase?
- How does the Federal Reserve influence interest rates as part of its monetary policy?
- What happens to interest rates due to the crowding-out effect?
- What role do interest rates play in exchange rate determination?
- How do central banks influence interest rates through open market operations?
Resources
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