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# Price of money

sarapicoazul
What does "price of money" mean in economics ?

Thanks
risuarez
Hi there!

The "price of money" in Economics means "interest rates". The interest rate is the price you have to pay for borrowing money it is not yours and invest it somewhere else.

Just like if you were buying a product you have to give money ofr getting that good. In the same way when you are buying money you have to give more money to get that good, and the way you pay that extra money is with an interest rate over the principal. There are many ways of calculatin interest rates and diferentes criteria for setting them up. It alls depends on market where you "buy" the money.

hope I have helped you!
Raϊl.
drag0n
the 'price of money' could also refer to the two values of money

the material value - a 100\$ bill's material value is around 50c-maybe a dollar, and it's the cost of paper and such materials that money is made of (coins have high material value)

the functional value- a 100\$ bill is worth 100\$ worth of chocolate (example)
insanesnoopy
Under the speculative motive

Economic agents who hold money for this motive hold it because there is the price of money is invariant to the rate of interest, unlike bonds. It protects the agent from any risk associated with changes in the interest rate.

In this instance, money acts as a store of value, allowing the agent to transfer real purchasing power from the present to the future (assuming inflation is zero). Bonds are not as useful as money here because their value changes with fluctuations in the interest rate.
richard270384
Raul was right here.

The term 'price of money' refers to the current interest rate.

The government (or designated body) changes the interest rate in response to the current economic environment, and expectation of the future economic environment.

When the interest rate is increased, the value (or price) of money is higher. It essentially limits the amount of money being used in the economy, because it is more expensive. The interest rate as declared by the government is the rate that banks recieve on the money they deposit with the government overnight. Changes in the interest rate that the banks recieve are usually passed on to consumers quickly. Consumers then have less money to spend for other purposes as they pay more back on loans and credit.

When the interest rate is decreased, the value of money is less. THat means that more money is available to flow in the economy and consumers and business spend more on goods and services.

The government uses interest rate strategies usually as a response to high or low inflation.

Cheers,
Richard
Simplechat
As was said earlier, the price of money is the interest rate.

This is basically because it is the price you are paying (in the form of interest) to gain access to said money.

As interest rates go up, it becomes more expencive to invest in infrastructure (ie. net capital expendature decreases), which then means that less net infra is made, decreasing the increase in total productive capacitiy of the economy, decreasing economic growth.

Because of this effect, the government can controll the economy through changing interest rates. Usually there is a central body which looks at key economic indicators (CPI, GDP, etc) and decides which way interest rates should move. (if they should move at all).

HTH,
Simple
russel26
is a part of economics