As do other prices, interest rates serve as an allocative function in the economy.
What Is an Interest Rate?
The cost of borrowing money to use its purchasing power; typically represented as an annual percentage of the nominal (i.e., not inflation-adjusted) amount borrowed. The interest rate is seen by the borrower as a cost for spending money before it is earned. The interest is the compensation the lender receives for delaying consumption of current goods until the loan's maturity. When the loan is repaid in full, the borrower gives the lender the original amount borrowed (the principal).
How much does actual interest cost?
The equilibrium rate of interest is the real rate. This is the fundamental long-term interest rate in the economy, and it is based on real economic activity. is predicted to be between 2 and 4%.
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