1. Role of Interest Rates
1.1. 1-Generating
1.1.1. an adequate volume of savings in order to fund investment and growth in the economy (Interest Attracts -Depositor).
1.2. 2-Directing
1.2.1. the flow of credit in the economy toward those investment projects carrying the highest expected rates of return
1.3. 3-Bringing
1.3.1. the supply of money (Cash Balances) into alignment with the demand for money.
1.3.2. If there are less deposits - the bank will increase the interest rate on deposit
1.3.3. If there are less borrowers - the bank will decrease interest rate on loans.
1.4. 4-Serving
1.4.1. as a tool of government economic policy so that the nation can better achieve its broad economic goals of full employment and avoidance of serious inflation
2. Interest
2.1. is the monetary charge for the privilege of borrowing money
2.2. It is the amount of money a lender or financial institution receives for lending out money
2.3. is the rate at which the borrower is charged for the use of money
2.4. An interest rate is often expressed: as an annual percentage of the principal
2.5. Formula: I = Principal × Rate×Time (PRT)
3. Types of Interest Rates
3.1. 1-Nominal Interest
3.1.1. The interest rates are observed and quoted, with no adjustment for inflation.
3.1.1.1. It includes inflation rate
3.2. 2-Real Interest
3.2.1. Rates are adjusted for inflation effects
3.2.2. Inflation rate is deducted from nominal rate, that makes it the net interest.