Transcript Economics: Interest Rates

Economics: Interest Rates
Vanessa Martinez
Winnie Reece
AP Economics
Period 0
Interest Rates
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An Interest Rate is the price a borrower pays for the use of money
one does not own. [usually expressed as a percentage rate over the
period of a year]
Interest Rates targets are also a vital tool of the monetary policy, and
are used to control variables like investment inflation and
unemployment
A Nominal Interest Rate is the amount of payable interest
For example, suppose a household deposits $100 with a bank for 1 year and they
receive interest of $10. At the end of the year their balance is $110. In this case, the
nominal interest rate is 10% per annum.
A Real Interest Rate measures the purchasing power of interest
receipts
Is calculated by adjusting nominal interest rates charged to take
inflation into account.
For Example If inflation in the economy has been 10% in the year, then the $110
in the account at the end of the year buys the same amount as the $100 did a
year ago. The real interest rate, in this case, is zero.
Calculating Real vs Nominal Interest Rate
Ir = In – p
P is the overall inflation rate of that year.
 Ir = In – pe
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Expected real returns on an investment before being
made.
In = Nominal Interest Rate
Ir = Real Interest Rate
Pe= Projected or expected rate all year.
Market Operations in the U.S
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Using the power to buy and
sell treasury securities, the
Open Market Desk at the
Federal Reserve Bank of
New York can supply the
market with dollars by
purchasing T-notes,
increasing the nation's
money supply. By increasing
the money supply or
Aggregate Supply of
Funding (ASF), interest
rates will fall due to the
excess of dollars banks will
end up with in their reserves.
Federal Funds Rate
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The federal funds rate is the interest rate at
which private depository institutions (mostly
banks) lend balances (federal funds) at the
Federal Reserve to other depository
institutions, usually overnight. Changing the
target rate is one form of open market
operations that the Chairman of the Federal
Reserve uses to regulate the supply of
money in the U.S. economy.
Mortgage Interest Rate
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that limit the amount the
interest rate on an ARM loan
can change in an
adjustment interval and/or
over the life of the loan. For
example, if your per-period
cap is 1% and your current
rate is 7%, then your newly
adjusted rate must fall
between 6% and 8%
regardless of actual
changes in the index
Sources
Mortgage101
http://www.mortgage101.com/Rates/Index.asp?p=mtg1
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 Wikipedia
http://en.wikipedia.org/wiki/Interest
 Quicken loans
https://www.quickenloans.com/mortgageglossary/interest-ratecap?qls=MLP_Refernce.MtgGls0155
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