Abstract
It is a well known that interest rates have a commensurable power to influence the economy as a vital tool of monetary policy that is used to control variables like investment, inflation, price stability and unemployment. Generally speaking, the interest rate is described as the cost of using money. We will try to understand what the interest rate precisely is and what determines the prime rate. Then, we will focus on the means to influence the levels in a given an economic situation by the Fed. Finally, we will prove these different possible variations with the help of historical examples. The interest rate is the price that is usually expressed in percentage over a period of time. In simple terms, it is the price that someone pays for the temporary use of someone else's funds (Federal Reserve Bank of New York, 2002). In a way, Interest is the compensation that someone receives for temporarily giving up the ability to spend money or the use of money for a period of time. Let's clarify it with the equation of the simple interest rate (calculated on the original price).
