Interest

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  • The payment to the lender for the use of borrowed money or financial capital. Interest is paid because the value of money depreciates over time as prices rise. Compensation is required for that loss and the postponement of consumption. Interest is also paid to minimize the cost of default.

    The nominal-interest rate is a combination of expected inflation and the real-interest rate, whereas the real-interest rate is the difference between the nominal rate and expected inflation. The interest rate is normally one of the most telling indicators of whether people will be willing to hold more or less money. When the interest rate is high, people tend to hold less money and more money when it is low.

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