what is the purpose of an interest rate?
In: Economics
Interest rates are the price of borrowing.
Money is worth more today than in the future. Like, think about it: would you rather have $100 today or $100 one year from now?
If I borrow $100 from you to pay it back one year later at no interest, this is strictly a loss for you. This is why, when lending, people demand interest payments.
Well, what interest rates get chosen? It depends on a lot of factors, like the risk the borrower won’t repay, the value of a dollar to the lender in the here and now, and the amount of dollars the lender has available.
The last is what can be acted upon by policy. Central banks can, in effect, make money more available by loaning it out more cheaply – pushing borrowing costs down across the system. They can, of course, also do the opposite.
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