Question

Suppose, for simplicity, that a bank uses a single interest rate for loans and deposits, there is no inflation, and all unspent money is deposited in the bank. The interest rate measures which of the following?

a. the cost of using a dollar today rather than a year from now
b. the benefit of delaying the use of a dollar from today until a year from now
c. the price of borrowing money calculated as a percentage of the amount borrowed

Answer 1

All the options are correct.

Step-by-step explanation:

It is assumed that a bank uses a single interest rate for both loans and deposits. There is no existing inflation in the economy. Money which is not spent is deposited in the bank.

On the basis of these assumptions, we can say that the interest rate is the cost of borrowing money which is calculated as a percentage of the principal or the amount borrowed.

For a depositor, it is the return on depositing money or benefit of depositing money instead of using it immediately.

It can also be referred to as the opportunity cost of not depositing the money in the bank but spending it instead.