Interest rates

The interest rate is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned.

The differences in rates can be due to the duration of the loan or the perceived riskiness of the borrower.

Nominal and Real interest rates:

A nominal variable, such as a nominal interest rate, is one where the effects of inflation have not been accounted for.

Real interest rates are interest rates where inflation has been accounted for.

What happens if the interest rates goes to negative?
Zero nominal interest rate: A zero nominal interest rate occurs when the interest rate is the same as the inflation rate.I loan $100 to someone, I get back $104, but now what cost $100 before costs $104 now, so I'm no better off.


During a recession, central banks tend to lower nominal interest rates in order to spur investment in machinery, land, factories, etc. If they cut interest rates too quickly, they can start to approach the level of inflation.(People spend more money and the commodities fail to expand as fast as money does) Inflation will often rise when interest rates are cut, since these cuts have a stimulative effect on the economy.

 When expected returns from investments in securities or real plant and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. People and businesses then continue to hold cash because they expect spending and investment to be low. This is a self-fulfilling trap.(Liquidity trap)