003: Money Basics: Interest Rates

Continuing our discussion about Basic Money concepts.

Lesson #3 - Interest Rates

What is an interest rate? - it’s a rate which is charged or paid for the use of your money. An interest rate is often expressed as an annual percentage of the principal. For example, you pay 4% per year to obtain a mortgage to buy a house or your earn 1% per year on your savings account.

Interest rates are one of the most important aspects of the American economic system. They influence the cost of borrowing, the return on savings. Moreover, certain interest rates provide insight into future economic and financial market activity.

Here is an example of a domino effect: Interest rates affect consumer spending. The higher the interest rates are, the higher consumer loans will cost them, and the less consumers will be able to buy on credit. If consumer spending goes down, there will be less demand for products and services, therefore prices won't rise as rapidly. However, higher interest rates are more favorable for our savings and investments. This is how this sequence of events affects the inflation. Interest rates often change as result of inflation & Federal Reserve Board policies.

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