Interest Rates
Interest is the price paid for the use of money.
It is usually viewed as the money that must be paid for the use of one dollar for one year.
The interest rate is determined in the "money market" (recall the supply + demand of money graph - see 'Macroeconomics: Chapter VII)
Real interest rates are used by businesses to consider investment decisions
There are many different interest rates with different names and they vary for many reasons
Varying degrees of risk (riskier loans carry higher rates)
Differing maturities on the loan (higher rates usually on longer-term loans)
The size of the loan (larger loans have lower rates)
Taxability (interest on some local and state bonds is tax-free; the interest would be lower, since lenders don't have to pay federal taxes on that interest income)
Market imperfections play a role, because some banks in smaller towns have more market power than banks that have a lot of competition
To circumvent the difficulties in discussing the whole structure of interest rates, economists talk of "the" interest rate, or the pure rate of interest.
This is best approximated by the interest paid on long-term, riskless bonds such as the long-term bonds of the U.S. government.
Recall the effects of changing interest rates on GDP
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