Cost of Money vs. Purchasing Power
The cost of money is the sum of money that a person or company must pay to borrow money, whereas purchasing power is the number of goods or services that a certain sum of money may buy. The amount of money that must be paid back over a predetermined period of time as interest is how the cost of money is typically stated. The cost of borrowing money increases as the interest rate rises.
Purchasing power, on the other hand, is a measure of how much a given amount of money can buy in terms of goods or services. Several factors, including the level of inflation in the economy, the availability of goods and services, and the relative strength of different, influence it.
In general, when the cost of money is high, purchasing power is low, and the opposite is true when the cost of money is low. This is because when money is expensive, people and businesses have less disposable income to spend on products and services, which can reduce demand and drive down the cost of those goods and services. On the other hand, when the cost of money is low, people and businesses have more money than they may spend. This can lead to an increase in demand for goods and services as well as an increase in their cost.
Nominal vs Real Interest Rates
The portion of a loan that is charged to the borrower is called an interest rate, and it is often stated as an annual percentage. Lenders utilize interest rates to cover the risk they assume when making loans, and they can also be used to help keep inflation under control.