AP MacroeconomicsMoney, Banking & Finance
Interest Rate
An interest rate is the cost of borrowing money or the reward for saving it, expressed as a percentage of the principal per year.
Interest rates are set in money and loanable-funds markets and steered by the central bank. Lower rates encourage borrowing, investment, and spending; higher rates encourage saving and slow the economy. The real interest rate (nominal minus inflation) reflects the true cost of borrowing.
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Loanable Funds →
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Study module
The Loanable Funds Market →
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