INTEREST RATES: THE PRICE OF MONEY

When we later examine how money affects economic activity,we will focus on the interest rate, which is often
called the price of money.

Interest-is the payment made for the use of money. The interest rate i the amount of interest paid per unit of time expressed as a percentage of the amount borrowed. In other words, people must’ pay for the opportunity to borrow money, The cost of borrowing in dollars PCI year per dollar borrowed. is the interest rate.

When you graduate from college, you have $500 to our name, You decide to keep it in currency. If spend none of your funds, at the end of a ear roue still have S 500 because currency has a zero interest rate.

You start your first job and decide. to buy a small house that costs $100,000. You go to your local bank and find that 3(}.year, fixed-interest-rate mortgages have an interest rate of 10 percent per year. Each month you make-a mortgage payment of $877.58. Note that this payment is a little bit more than the pro-rated monthly interest charge of 10/12 percent per month. Why? Because it includes not only interest but also amortization. This is repayment of principal, the amount borrowed. By the time you have made your 360 monthly payments, you will have completely paid off the loan.

From these examples we see that interest rates are measured in percent per year. Interest is the price paid to borrow money, which allows the borrower to obtain real resources over the time of the loan.

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