One of the biggest problems for any economy is to figure out is how to get money from people who want to save to people who want to borrow. Finance is the answer to that problem. If you think of the economy as a body, finance would be the heart, pumping money from pension funds in Iowa to construction sites in Madrid.
Banks are institutions that hold on to money for some people and lend money to others. When you put money in a bank, you are technically lending the bank your money. You agree to hand over cash, and the bank agrees to give the cash back whenever you want it—but they’ll spend it on other loans and investments in the meantime. The bank even pays you a small fee for giving them money, called an interest payment.
Interest rates are the price you pay to borrow money (or on the flip side, the payment you receive when you lend money.). They’re generally framed as percentages. Each year you either pay (if you’re borrowing) or receive (if you’re lending) this percentage of the total amount of the loan. For example, for a $100 loan with a 10% interest rate, the borrower would have to pay the lender $10 at the end of the year.
Usually, an interest rate is the fee you pay to borrow money or the fee you charge to lend money. Negative interest rates flip this around. Borrowers are paid to borrow money, and lenders pay to lend it. Negative interest rates are rare but not unheard of.
An exchange rate is the price of one currency, in terms of another currency. When we’re trading across national borders, we use these rates to work out how much what we’re trading is worth in the other country’s currency.
