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What is an Interest Rate

Interest rate is the price of the use of money or can also seen as a lease for the use of money for a certain period. Or the price of borrowing money to use its purchasing power and is usually expressed in percent (%).

Bank interest can be interpreted as the remuneration provided by a bank based on Conventional principles to customers who buy or sell their products. Interest can also be interpreted as the price that must be paid to the customer (who has deposits) with what must be paid by the customer to the bank (customers who get the loan).

  1. In the daily banking activities there are two kinds of interest given to its customers, namely:
    Interest Savings interest is given as a stimulus or compensation services for customers who save money in the
  2. The deposit interest is the price that the bank must pay to its customers. Example: services.
    Loan Interest is the interest given to the borrower or the price to be paid by the customer loan to the bank. Example: credit interest.

Both kinds of interest is a major component of cost and income factors for banks. Saving interest is the cost of funds that must be spent to the customer while the interest on the loan is the income received by the customer. Both the interest on deposits and the interest of the loan each affect each other. For example, if the interest rate of the loan is high, the loan interest will automatically increase and vice versa.

 

Interest Rate Theory

The classical flower theory is called “The Pure Theory of Interest”. According to this theory, high interest rates are determined by demand and supply of capital. So capital has been regarded as the price of the opportunity of capital use. Just as the price of goods and services, the high and low is determined by demand and supply, as well as the high capital interest rate is determined by demand and supply of capital.

According to the classical theory, saving is a function of the interest rate on the economy will affect the savings (savings) that occur. Means the desire of the people to save is dependent on the interest rate. The higher the interest rate, the greater the desire of the public to save or the community will be compelled to sacrifice expenditures in order to increase the amount of savings. So the interest rate according to the classic is the remuneration a person receives because of savings or gifts received by someone because of delayed consumption.

Investment is a function of interest rates. The higher the interest rate, the less the public wants to invest. Because the expected profit from the investment will be more than the interest rate (the cost of using the loan). When there is a condition of interest rates in equilibrium, meaning that no incentive to save will be the same as an entrepreneur’s drive to invest.

The level of interest balance is at io where at this rate the rate of savings that occurs equal to the level of investment. As the interest rate moves up (moving from i0 to i1), then the amount of investment (investor desire to invest) decreases. Conditions that occur at the interest rate i1 funds (they will compete offer so the interest rate on i1) will move down or back at the interest rate i0.

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