# What Are Interest Rates?

Interest rates are growth rates – it is a percentage that is used to calculate how much a loan or investment grows over time.

Interest rates are most commonly associated with borrowing money, like a homeowner taking out a mortgage or a government selling a bond. The interest rate is how much extra needs to be paid back in exchange for the loan. Interest rates are also used in savings accounts, where you might earn interest on your savings.

# What Do High Interest Rates Mean?

At the end of the day, when real interest rates are high across the economy, it means that a lot of people and businesses are borrowing money. This means that there is a general shift from saving to spending, and the allocation of resources over time has shifted from the future to the present (as a total economy, we are borrowing money from our future selves).

Economics In Action!
When the economy is in a recession, the Federal Reserve tries to lower interest rates to encourage borrowing. In an expansion, they raise interest rates to prevent a crash.

Higher interest rates mean that it is getting more expensive to borrow, which encourages people to save more, which starts to shift the balance of resources back to the future, and cause interest rates to fall in the long term.

In the short term, making it more expensive to borrow money means that people and businesses will be spending less on large purchases, like buying new equipment or a new house.

Having very high interest rates acts as a kind of “break” on the economy, slowing things down as people and businesses try to put off large purchases. This has a ripple effect through the economy. Rising interest rates are typically a result of economic growth, while falling interest rates are typically a symptom of an economic slowdown.

# Pop Quiz

If reading this article was an Assignment, get all 5 of these questions right to get credit!

Click "Next Question" to start the quiz!

1 of 5) What is the Real Interest Rate?
2 of 5) What do high interest rates encourage?
3 of 5) Which of the following would likely lower your interest rate for a loan?
4 of 5) What happens when people expect higher inflation?
5 of 5) How can you find the "Future Value"?