Interest Rate Policy Concepts

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Interest Rate Policy

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A macroeconomic policy centered on adjusting interest rates to influence economic activity.

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Expansionary Interest Rate Policy

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Adopted when the economy is heading towards a recession with high cyclical unemployment. It involves lowering interest rates to stimulate the economy.

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Contractionary Interest Rate Policy

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Adopted when the economy is overheating and facing high demand-pull inflation. It involves raising interest rates to cool down the economy.

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Nominal Interest Rate

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The stated interest rate before taking inflation into account.

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Real Interest Rate

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Nominal interest rates minus the inflation rate. A negative real interest rate means that the nominal interest rate is lower than the inflation rate.

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Cost of Borrowing

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The expense associated with taking out a loan, which is reduced with lower interest rates and increased with higher interest rates.

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Returns on Savings

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The yield or profit earned from saving money, which is reduced with lower interest rates and increased with higher interest rates.